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Large deal wins to drive growth

Infosys Limited provides IT consulting and software services, including ebusiness, program management and supply-chain solutions. It also offers application development, product co-development, system implementation and system engineering services.

• Revenue surged 20.2% YoY to Rs. 38,318cr in Q3FY23, led by broadbased growth across all industries and regions. PAT increased 13.4% YoY to Rs. 6,586cr.

• EBITDA margin remained stable QoQ at 24.4%, driven by healthy revenue growth and cost-optimisation benefits.

• The company reported exceptionally strong earnings, driven by growth in its digital offerings and core services, despite a seasonally weak quarter. A strong portfolio, a diverse service line and an aggressive approach would help the company sustain its performance in the future, in our view. Hence, we upgrade our rating to BUY on the stock, with a revised target price of Rs. 1,692 based on 22x FY25E adjusted EPS.

Resilient quarterly performance

In Q3FY23, company’s revenue rose 20.2% YoY to Rs. 38,318cr (+4.9% QoQ), despite a seasonally weak quarter. Revenue from digital offerings jumped 29.2% YoY to Rs. 24,103cr, increasing its share of total revenue to 63%. Core services revenue grew 7.5% YoY to Rs. 14,215cr. EBITDA increased 11.7% YoY to Rs. 9,367cr, while margin remained stable at 24.4% sequentially and declined 190bps YoY. The margin benefitted from favourable currency movements and cost optimisation, which offset traditional seasonal weakness and furloughs. PAT increased to Rs. 6,586cr (up 9.4% QoQ and 13.4% YoY), led by higher other income (+31.7% QoQ, +50.3% YoY).

Key concall highlights

• Infosys has retained its margin guidance for FY23 between 21% and 22%. It has increased the revenue guidance from 15-16% to 16-16.5%.

• During the quarter, the company reported a steady decline in the attrition rate. The annualised attrition rate decreased 6%. Consequently, its LTM attrition reduced to 24.3%, compared with 27.1% in Q2FY23.

• Infosys reported a strong total contract value (TCV) of $3.3bn (the highest in the last eight quarters) with 32 large deals.

Continued robust performance across verticals

All verticals are gaining traction, as reflected in the deals won. Energy, utilities, resources and services grew 32.5% YoY (10.2% QoQ), and manufacturing grew 41.7% YoY (8.8% QoQ), with five deal wins each during the quarter. Communications grew 18.4% YoY (4.6% QoQ), and financial services rose 12.1% YoY (0.8% QoQ), with six deal wins each. Retail increased 18.8% YoY (5.7% QoQ), with seven deal wins. Further, the company won two deals in life sciences and one in high-tech.

Valuation

Despite the prevailing macroeconomic uncertainty in the market, deal wins and the project pipeline for the company remain solid, positioning it well to capture market share with its strong execution. We see strong sustained demand driving revenue growth and contributing to continued earnings growth over the long term. In addition, the valuation is no longer expensive, which makes the risk-reward profile attractive. We upgrade our rating to BUY on the stock, with a rolled forward target price of Rs. 1,692 based on 22x FY25E adjusted EPS.

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