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Stronger revenue outlook to drive valuation premium

Margin to gradually normalize

* INFO reported a growth of 5.5% QoQ in CC terms, above our estimate of 3.9%, led by strong growth across industry verticals, excluding Financials. While large deal TCV (USD1.7b, net new at 50%) was soft, the management indicated continued traction in the large deal pipeline and demand. Though it indicated weakness in parts of Financials and Retail, INFO raised its FY23 revenue growth guidance to 14-16% from 13-15% in last quarter. EBIT margin dipped by 150bp QoQ to 20.1%, below our estimate of 20.8%, on higher wage hikes and robust employee hiring in 1QFY23 (up 21k QoQ).

* We were positively surprised by INFO’s guidance revision, especially given the moderating macroeconomic environment. While a large part of the revision was on account of its 1QFY23 performance, the robust headcount addition (42k employees over the last two quarters, a 15% increase) shows the confidence of the management in their client pipeline and leaves room for further upward changes. We factor in 12% revenue CAGR over FY22-24.

* The weak margin performance remains a drag on earnings growth, although the same was visible across the largecap IT Services industry. With a lion’s share of the salary hike factored in its 1QFY23 print and the up fronted hiring of freshers, INFO should be able to deliver an improvement in margin over the remaining three quarters. We factor in a margin of 20.9%/22.1% in FY23/ FY24. This should lead to a PAT CAGR of 13.3% over FY22-24.

* INFO has de-rated by over 20% on YTD basis due to macro slowdown related concerns on revenue growth. We expect the upward revision in its revenue guidance to provide comfort to investors on its near to medium term growth and support the share price, given its relative outperformance.

* INFO reported a strong FCF/PAT conversion of 95% in 1QFY23.

* We have lowered our FY23/FY24 EPS estimate by 3.5%/2.5%, given the margin pressure. We view INFO as a key beneficiary of an acceleration in IT spends, given its capabilities around Cloud and Digital transformation. We value the stock at 26x FY24E EPS and reiterate our Buy rating.

Revenue beat and unexpected increase in its guidance

* In CC terms, revenue grew 21.4% YoY, INR EBIT rose 5%, and INR PAT increased by 3% in 1QFY23.

* Revenue stood at USD4.44b, up 5.5% QoQ in CC terms, above our estimate of 3.9%.

* EBIT margin fell 150bp QoQ to 20.1% (est. 20.8%).

*  It revised its FY23 revenue growth guidance up to 14-16% (from 13-15% YoY earlier) in CC terms. Margin guidance moved to the lower end of its 21-23% range.

* PAT fell 6% QoQ to INR54b, below our INR57b estimate on a higher tax rate.

Key highlights from the management commentary

* It is seeing small pockets of weakness in Mortgage, Lending, and Retail in terms of slower decision making, but the pipeline remains strong.

* The management raised its revenue guidance to 14-16% CC in FY23 from 13- 15% CC in last quarter.

* Margin has bottomed out in 1QFY23. The management expects FY23 margin to be at the lower end of its guidance of 21-23% due to supply pressures.

Valuation and view

* INFO posted strong earnings in 1QFY23. Demand and the order book remain robust. The increase its FY23 growth guidance and high headcount addition provides further visibility on demand.

* We expect INFO to deliver margin on the lower side of its guidance band, with strong growth and reduced dependence on sub-contractors as attrition falls.

* We expect INFO to be a key beneficiary of an acceleration in IT spends. Based on our revised estimates, the stock is currently trading at 22x FY24E EPS. We value the stock at 26x FY24E EPS, implying a TP of INR1,760.

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