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Excellent growth in 3QFY22 to drive further outperformance

Strong growth to continue, reiterate Buy

* INFO reported a growth of 7% QoQ CC, ahead of our estimate of 4.8%, on the back of a broad based performance. Large deal TCV stood at USD2.53b (net new at 44%). The management indicated traction in large deals, and highlighting that the deal pipeline was the highest in a very long time.

* EBIT margin dipped only 10bp QoQ to 23.5%, in line with our estimate, despite a drag from employee additions (12.5k), higher sub-contracting, and lower utilization (-70bp QoQ) in 3QFY22. A strong topline growth drove PAT growth of 7.2% QoQ to INR58b.

* With an exceptional 3Q performance in topline, INFO increased its FY22 USD revenue growth guidance to 19.5-20% YoY CC (from 16.5-17.5%). While we anticipated a more modest guidance raise, growth in 3Q will ensure that its FY22 revenue growth will again beat its latest guidance by 100bp. A good revenue growth in 2HFY22 will also help it deliver high teens growth in FY23, which would be viewed positively by investors.

* Moreover, the commentary around improving pricing and attrition should ease any concerns on margin going forward. While there was a sharp jump in LTM attrition (550bp), the management indicated that it has stabilized on a quarterly annualized basis (a sentiment echoed by its peers also), and should start moderating going forward. We expect the company to improve its EBIT margin by 60bp to 24.3% in FY23E.

* INFO reported a strong FCF/PAT conversion of 93% in 3QFY22. FCF in 3QFY22 decreased by 7% YoY. 9MFY22 USD Revenue/EBIT/PAT grew 20.9%/16.1%/15.3% YoY.

* We have marginally upped our FY23-24E EPS estimate by 3-4% on stronger than expected performance in 3QFY22. We continue to view 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 FY24E EPS and reiterate our Buy rating.

Excellent topline performance in 3QFY22

* In CC terms, revenue/INR EBIT/INR PAT grew 21.5%/14%/12% YoY in 3QFY22.

* USD CC revenue of USD4.25b (+7% QoQ CC) was above our estimate of 4.8%, with reported USD growth of 6.3% QoQ.

* The company reported strong growth in Manufacturing (+10% QoQ, impact of Daimler), Communications, Life Sciences, and Retail.

* EBIT margin fell 10bp QoQ to 23.5% and was in line with our estimate.

* INFO added 12.5k employees. Sub-contractor cost rose 14% QoQ.

* The management has yet again revised its FY22 revenue growth guidance to 19.5-20% (from 16.5-17.5% YoY earlier) in CC terms, ahead of our 150bp expectation.

* We expect FY22 revenue to be ahead of its guidance and bake in nil growth in 4Q.

* The company reported a large deal TCV of USD2.53b, up 18% QoQ.

* Attrition (LTM) rose 550bp QoQ to 25.5%. Utilization stood at 88.5% (-70bp QoQ).

* Net profit of INR58b (+7.2% QoQ) was in line with our estimate.

* DSO (LTM) increased by five days sequentially to 71 days. FCF declined by 7% YoY to USD719m, with FCF conversion at 93% of net profit.

* Total cash and equivalents in 3QFY22 stood at USD4.28b.

* The management has yet again upgraded its revenue growth guidance. The same now stands at 19.5-20% YoY CC (v/s its earlier guidance of 16.5-17.5% YoY CC). Its EBIT margin guidance remained unchanged at 22-24%.

Highlights from the management commentary

* All sectors and core geographies saw broad based growth, with the Digital business growing 42.6% YoY CC.

* TCV stood at USD2.53b, of which 44% were net new. The pipeline is one of the strongest in a very long time, with a good amount of large deals.

* Financial Services is seeing demand across all regions. Demand is robust from the Lending, Mortgage, and Card space. The Cloud remains an area of traction.

* Retail saw good demand from increased client spends in Digital transformation and supply chain. The company won six large deals in Retail.

* Growth in Communications was led by a ramp up in earlier deal wins. INFO is gaining traction in customer experience, networking, 5G, and Cloud.

* E&U had five new deal wins, with cyber security and workload transformation being the areas of focus in this vertical.

* Growth in Manufacturing in 3QFY22 was aided by a ramp up in the Daimler deal. The management sees strong traction in the areas of Smart Manufacturing and IoT.

Valuation and view – Expect multiples to converge with TCS

* INFO delivered a strong performance in 3QFY22. We expect it to deliver top quartile growth in FY22E given its strong capabilities and ramp up in large deal wins.

* We expect margin to sustain 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 on the supply-side, we expect them to normalize in the next couple of quarters.

* INFO remain our top pick in the IT Services space due to its headroom for increased growth potential, which was further reinforced by its 3QFY22 earnings.

* As INFO has been outperforming TCS, we expect no valuation divergence between the two companies. Based on our revised estimates, the stock is currently trading at 28x FY23E EPS. We value the stock at 30x FY24E EPS, implying a TP of INR2,310.

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