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Robust operating performance; well placed to manage near term uncertainty

Result Synopsis

Infosys (INFO) reported strong financial performance for the quarter. While, the revenue growth was inline, EBIT margin came in above estimates. It reported constant currency growth of 4.0% QoQ, led by Manufacturing( up 45% YoY in cc terms) and Energy and Utilities( up 24.3% YoY in cc terms). The INR reported growth of 6% QoQ was supported by depreciation of INR by 3.4% QoQ vs USD. There was sequential improvement in EBIT margin(up 149 bps QoQ) led by improving pyramid, better realization and other efficiency measures. There was slight moderation in employee attrition as LTM attrition was down 130 bps QoQ to 27.1%.

The multiyear tech adoption cycle broadly remains intact led by adoption of cloud and data analytics. However, the clients have become cautious regarding the evolving macroeconomic situation and there are signs of slowdown in discretionary spending in sectors such as Hitech, Retail, Logistics etc. and can lead to near term moderation in revenue growth. Employee attrition has started moderating and should support operating margin going ahead We estimate revenue CAGR of 15.0% over FY22?24E with average EBIT margin of 22.4%. We maintain our BUY rating on the stock with revised target price of Rs 1,725/share at 24.0x on FY24E EPS. We have slightly reduced our target multiple from 25.0x to 24.0x to account for risks from evolving macroeconomic situation. The stock trades at PER of 24.3x/19.8x on FY23E/FY24E EPS.

Result Highlights

* Reported revenue of Rs 365.4bn( up 6% QoQ in INR terms, up 2.5% QoQ in USD terms). The cc growth was 4% QoQ. Digital now accounts for 61.8% of revenue vs 61% in Q1FY23. In terms of verticals, the growth was led by Manufacturing( up 45% YoY in cc terms) and Energy and Utilities( up 24.3% YoY in cc terms).

* EBIT margin increased by 149 bps QoQ to 21.5%, led by improving employee pyramid and other productivity measures. Large deal wins were strong at $2.7bn vs $1.7bn in Q1FY23 and $2.15bn in Q2FY22.

* Gross client addition was 103 vs 106 in Q1FY23. Days sales outstanding increased to 65 days vs 63 in Q1FY23. Offshore effort mix was down 10 bps QoQ to 75.6%. Added 10,032 employees in the quarter to close at 3,45,218 employees. LTM attrition was down 130 bps QoQ to 27.1%. Utilization (excluding trainees) was down 110 bps QoQ to 83.6%

* Revised up its revenue growth guidance to 15%-16% in cc terms for FY23 vs earlier guidance of.14%-16%. Also, has given EBIT margin guidance of 21-22% for FY23. Announced interim dividend of Rs 16.5/ share and share buyback plan of Rs 93bn.

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