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All eyes on the guidance

Infosys is all set to extend its growth leadership amongst the Tier I techs in FY23. While recent global turmoil does need watching due to risk from slower decision-making, the company remains confident of underlying client spending trends as enterprises look to benefit from native cloud capabilities beyond the initial cloud migration. The company has done well in terms of mining and scaling up the USD 100 Mn+ relationships (INFO has outperformed TCS on no of USD 100 Mn+ client additions over the past 3 years). The company believes that while the momentum in Digital remains strong, emerging stability on the Core services business (almost flat YoY revenue growth trajectory through FY22YTD on the back of 9 prior quarters of YoY declines, refer exhibit below) is a proof of relative strength for the company. INFO is likely to guide for 12-14% YoY c/c revenue growth for FY23. We expect INFO to bake in ~100 bps YoY decline in EBIT margins with a likely band of 21-23% (V/s 22-24% in FY22). We see INFO’s earnings upgrade cycle taking a near term pause with the recent global macro posing risk to client decision making even as the outlook on tech outlay remains encouraging in key verticals.

* Doing a good job at scaling the USD 100 mn+ relationships:

Infosys has done well in scaling up the no of USD 100 mn+ accounts through the course of the current CEO, Salil Parekh’s tenure. We note that INFO has added 14 USD 100 mn+ clients through the last 3 years and in fact outperforming TCS on this front. The focus on mining the top clients has been pivotal to INFO’s growth outperformance with INFO now outperforming TCS on revenue growth for 3 years in a row. Given favourable arithmetic’s, Infosys will have an upper hand going into FY23 as well. We however note that while INFO has done well in scaling the client metrics both at the higher end as well as lower end (no of USD 10 mn+ clients), it has not scaled up the no of USD 50 mn+ accounts that well in recent times. Further, INFO believes that the relative stability in the revenue performance ex Digital (41.5% of revenues as of 3QFY22) is a further reaffirmation of relative share gains and strength in Automation.

* Infosys could guide for 12-14% c/c revenue growth and 21-23% EBIT margins:

We believe that Infosys could guide for 12-14% YoY c/c growth for FY23. This would compare with ~20%+ YoY c/c growth in FY22. Given the strong exit, this outlook would imply ~1.9-2.6% CQGR through the year and would broadly be in line with the typical growth rates implied by company’s outlook in the past (refer exhibits below). Infosys has seen ~100 bps YoY compression in margins in FY22 and may take down the margin guidance by ~100 bps to 21- 23% to bake in the revival in travel costs going into FY23.

* Near term pause to the EPS upgrade cycle for INFO as seen over the pasts 24 months:

Infosys has seen consistent upgrades to revenue growth assumptions and earnings estimates over the past 18-24 months. While we do not see any material cuts to growth assumptions, but reckon that there might be a near term pause to the earnings upgrade cycle for the stock. The recent global turmoil poses sector wide risks from slower decision making and this needs watching even as underlying global commentary on tech spending remains solid. We currently have a BUY on INFO with a TP of INR 2,080 based on 29x FY24E EPS. Our order of preference within Tier I techs is HCLT>INFO>TECHM(All rated BUY’s)> Wipro>TCS( both rated HOLD).

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