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Disappointing growth, margin under pressure

Long-term demand intact, reiterate Buy

INFO reported a weak growth of 1.2% QoQ CC, below our estimate of 2.8%, on account of seasonality, the impact from the COVID-19 pandemic, and client provisions. Large deal TCV of USD2.3b was a tad soft (net new at 48%). However, the management indicated good traction in its large deal pipeline and reiterated that the demand remains strong.

EBIT margin dipped 190bp QoQ to 21.6%, below our estimate of 23%, due to lesser days, lower utilization, and higher visa costs. The management guided at a margin of 21-23% for FY23 (100bp cut from its earlier guidance in FY22).

It guided at a revenue growth of 13-15% for FY23. We see scope for an upward revision in coming quarters as evident from past trends.

Strong headcount addition at 22k, a robust demand environment, and a robust revenue guidance for FY23 points towards continued strong revenue growth for FY23. We factor in 16% revenue CAGR over FY22-24. We factor in a margin of 22.4/23% in FY23/FY24.

Though attrition in LTM jumped 220bp to 27.7%, the management said it has fallen by 5% on a quarterly annualized basis. Utilization remains high, but should trend lower going forward.

INFO reported a strong FCF/PAT conversion of 101% in 4QFY22. FCF was largely flat YoY in 4QFY22.

We have lowered our FY23/FY24 EPS estimate by 5% on slower growth and 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 28x FY24E EPS and reiterate our Buy rating.

Disappointing result, margin under pressure

In CC terms, revenue grew 20.6% YoY in 4QFY22. In INR terms, EBIT/PAT grew by 8%/12% YoY.

In FY22, USD revenue/INR EBIT/INR PAT grew by 20%/14%/14% YoY.  In 4QFY22, revenue grew 1.2% QoQ CC, below our estimate of 2.8% QoQ. Reported USD grew 0.7% QoQ.

Growth was a function of the outperformance in Manufacturing (+51% YoY CC), Communications (+29%), and Hi-Tech (+21%).

In terms of geographies, the US grew 18.5% YoY CC, Europe rose 28.3%, and RoW increased by 13.9%.

Digital grew by 49% YoY CC, implying 59% of total revenue.

Large deal TCV in 4QFY22 stood at USD2.3b. Deal wins stood at USD9.5b in FY22.

EBIT margin dipped by 190bp QoQ to 21.6% (est. 23%) due to: 1) lesser days and client provisions (1.6%), 2) lower utilization (0.6%), and 3) visa, other costs, and one-off tailwind in 3QFY22 (1%).

Net profit fell 2.1% QoQ to INR57b, below our estimate of INR61b.

Attrition inched up by 220bp QoQ, while utilization, including trainees, moderated to 87%.

DSO (LTM) reduced by four days sequentially to 67 days.

FCF/PAT conversion stood at 101% for 4QFY22. FCF was largely flat YoY in 4QFY22. Total cash and investments in 4QFY22 stood at USD4.9b.

The management guided at 13-15% CC growth for FY23, with a margin band of 21-23%.

Highlights from the management commentary –

Revenue was impacted by seasonality, the COVID-19 pandemic, and client provisions created in 4QFY22 (less than 1% of revenue and expected to reverse going forward).

The company witnessed broad-based growth across all sectors and core geographies, with the Digital business growing 41% YoY CC.

INFO reported a TCV of USD2.3b, of which 48% were net new. The pipeline is healthy and has a good number of small, medium, and large deals. It has the largest ever large deal pipeline.

Margin in 4QFY22 stood at 21.6% (-150bp QoQ), impacted by: 1) lesser days and client provisions (1.6%), 2) lower utilization (0.6%), and 3) higher visa, other costs, and a one-off tailwind in 3QFY22 (1%).

Margin headwinds for FY23 include travel costs, on-site-offshore mix, and utilization. Reduced dependency on sub-contractor costs and efficiencies from automation are margin tailwinds for FY23.

Valuation and view

INFO posted weak earnings in 4QFY22 with slow growth and a meaningful dip in margin. Though growth in 4QFY22 was muted, demand remains intact and the order book remains strong. The management’s FY23 growth guidance and high headcount addition provide further visibility on demand.

We expect INFO to deliver margin on the higher 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 25x FY24 EPS. We value the stock at 28x FY24E EPS, implying a TP of INR2,000.

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