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Strong all-round beat, guidance revision above our expectation

Long-term traction intact, reiterate Buy

* INFO reported a growth of 6.3% QoQ CC, ahead of our estimate of 5.7%, on the back of a broad based performance. Large deal TCV of USD2.15b was a tad soft (net new at 37%). However, the management indicated good traction in medium and small size deals, and reiterated that the pipeline remains strong on robust demand.

* EBIT margin dipped 10bp QoQ to 23.6%, above our estimate of 22.3%, despite the impact of higher subcontracting expenses and wage hike in 2QFY22. Utilization (+70bp QoQ) and offshore mix (+50bp) remains stretched, despite strong hiring (11.7k, up 4.4%) in 2QFY22.

* We were positively surprised by the increase in its FY22 USD revenue growth guidance to 16.5-17.5% YoY CC (from 14-16%), an increase of 200bp at the mid-point v/s our expectation of a 100bp rise. We continue to see scope for a beat and a raise over the next two quarters as INFO benefits from a better large deal focus and demand tailwind.

* A strong topline growth (est. +19% YoY) should allow INFO to keep EBIT margin impact (due to supply side challenges) within a narrow band at the upper end of its guidance (maintained at 22-24%). Apart from operating leverage, it should also benefit from further flattening of the pyramid and continued operating efficiency measures in FY23.

* We see a sharp increase in attrition (20.1% in 2QFY22, up 620bp QoQ) as concerning, especially as utilization was at a record high of 89.2%, which is unsustainable. This remains a key monitorable in our view.

* INFO reported a strong FCF/PAT conversion of 97% for 2QFY22. FCF in 2QFY22 increased by 6% YoY.

* We have increased our FY22E EPS estimate by 2% on stronger than expected performance in 2Q. However, our FY23E EPS estimate remains unchanged. We continue to see INFO as a key beneficiary of an acceleration in IT spends, given its capabilities around Cloud and Digital transformation. We value the company at 30x FY23E EPS and reiterate our Buy rating.

Strong growth performance, revenue and margin beat

* In CC terms, revenue grew 19.4% YoY in 2QFY22. In INR terms, EBIT/PAT grew 12% each YoY.

* In 1HFY22, USD revenue/INR EBIT/INR PAT grew by 21%/17%/17% YoY.

* In 2QFY22, revenue grew by 6.3% QoQ CC, a tad higher than our estimate of 5.7%. USD revenue grew by 5.7% QoQ (est. 4.9%) and 20.7% YoY in 2QFY22.

* Growth was a function of outperformance in Manufacturing (+42.5% YoY CC), BFSI (+20.5%), Retail (+17.2%), and Life Sciences (+26.1%).

* US grew 23.1% YoY CC, Europe rose 19.6%, and RoW increased by only 4.7%.

* Digital grew by 42% YoY CC, implying 56.1% of total revenue.

* Large deal TCV in 2QFY22 stood at USD2.15b.

* EBIT margin dipped by 10bp sequentially to 23.6% v/s our estimate of 22.3%. Margin was resilient, despite headwinds from wage hike (110bp) and subcontracting cost (50bp). Margin performance in 2QFY22 was aided by cost optimization (80bp) and SGA leverage (50bp).

* PAT grew 11.9% YoY to INR54.2b, 3% below our estimates.

* Attrition inched up by 620bp QoQ, while utilization, including trainees, stretched further to 84.1%, an increase of 80bp.

* DSO (LTM) reduced by four days sequentially to 66 days. FCF grew 6% YoY to USD712m, with FCF conversion at 97% of net profit.

* Total cash and equivalents in 2QFY22 stood at USD4.42b.

* The management increased its FY22 guidance to 16.5-17.5% YoY CC from 14- 16%. Its EBIT margin guidance remained unchanged at 22-24%.

Highlights from the management commentary

* The company witnessed broad based growth across all sectors and core geographies, with the Digital business growing 42% YoY CC.

* Financial Services is seeing demand across all regions. Growth in North America is led by large transformation programs and an increase in market share. Digital transformation led cost takeout agendas and core modernization are areas of traction.

* The performance of the Retail vertical remains strong. Areas of commerce, marketing, supply chain, and analytics are witnessing traction. The company has a strong pipeline in this vertical and expects better performance in coming quarters.

* Communication growth was led by the ramp up of earlier deal wins. INFO is seeing increased momentum for capex for 5G deployment.

* E&U growth accelerated further, with continued large deal wins.

* Manufacturing growth in 2QFY22 was aided by the ramp up of the Daimler deal. The management sees strong traction in areas of Engineering, IoT supply chain, and Cloud migration. Growth in manufacturing will continue to be market leading for the company.

Valuation and view – Expect multiples to converge with TCS

* INFO posted a strong growth performance in 2QFY22. We expect the company to deliver top quartile growth performance in FY22E on the back of its strong capabilities and ramp up of large deal wins in FY21.

* We expect INFO to be able to sustain margin at the top end of its guidance band, led by: 1) strong topline growth and resultant operating leverage, 2) further flattening of the pyramid, and 3) continued operating efficiency measures. While there are near term headwinds from the supply-side, we expect them to normalize over the next couple of quarters.

* We expect INFO to be a key beneficiary of an acceleration in IT spends.

* Our relative preference for INFO over TCS is premised on its headroom for increased growth potential, which was further reinforced by this result.

* As INFO has outperformed TCS in FY21 and in 1HFY22, we expect no valuation divergence between the two companies. Based on our revised estimates, the stock is currently trading at 26x FY23E EPS. We value the stock at 30x FY23E EPS, implying a TP of INR1,960.

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