Buy Infosys Ltd For Target Rs.2,160 - Emkay Global
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All-round beat; FY22 revenue growth guidance raised
* Q3FY22 revenues beat our expectations, while the margin was in line. Revenues grew 6.3% QoQ (7% CC) to USD4.25bn. EBITM declined 10bps QoQ to 23.5% due to salary hikes and other employee interventions, negated by cost optimization.
* Infosys has raised its FY22 revenue growth guidance to 19.5-20% CC (earlier 16.5- 17.5%), implying 0.5-2% QoQ growth in Q4. Infosys remains confident of sustaining growth momentum on the back of broad-based demand, solid deal intake and a healthy deal pipeline. The company has retained its EBITM guidance at 22-24%.
* The intake of large deals was healthy at USD2.5bn in Q3FY22 (43% new), with 25 large deals signed during the quarter. The deal pipeline remains healthy with a good mix of new and renewal deals, offering good revenue visibility.
* We increase earnings estimates by 1.3%/1.5%/2.5% for FY22/FY23/FY24, factoring in the Q3 beat. We maintain Buy with a revised TP of Rs2,160 (earlier Rs 2,100) at 30x Dec’23E EPS, considering strong earnings momentum and a robust demand environment.
What we liked? Broad-based revenue growth, upward revision in FY22 revenue growth guidance, healthy deal intake, margin resilience
What we did not like? Spike in attrition (25.5% on LTM basis vs. 20.1% in Q2)
Robust revenue performance; FY22 revenue guidance raised to 19.5-20%: Q3 revenue growth was ahead of our expectations, with double-digit YoY growth across major verticals. Revenue grew 6.3% QoQ (7% QoQ CC) to USD4.25bn, driven by strong traction in digital. Revenue growth was broad based, led by Lifesciences (12.3% QoQ), Manufacturing (10.2%), Communication (7.2%), Retail (5.6%), Energy & Utilities (5.4%), Financial Services (3.7%) and Hi-tech (1.3%). Infosys signed 25 large deals with a TCV of USD2.5bn in Q3 (net new 43%). Infosys has raised its FY22 revenue growth guidance to 19.5-20% CC (earlier 16.5- 17.5%), implying 0.5-2% QoQ growth in Q4. Infosys’ strong broad-based revenue growth in a seasonally soft quarter clearly reflects the confidence clients have in the company’s capabilities, leading to consistent market share gains.
EBITM remains resilient in Q3; FY23 EBITM guidance retained at 22-24%: EBITM contracted 10bps QoQ to 23.5% due to compensation, hikes, promotions and other employee interventions (-80bps), and lower utilization (-40bps), partially offset by cost optimization and improvement in operational parameters (+50bps), SG&A leverage (+40bps) and currency benefits (+20bps). The company has retained its FY22 EBITM guidance of 22-24%. Supplyside inflation and likely normalization of discretionary costs (travel, facility and other related costs) remain headwinds to margins. However, revenue acceleration, improving business mix, employee pyramid and role ratio, right pricing in digital projects, automation and other operating efficiencies would support margins.
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