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Topaz to drive market differentiation and market leadership in GenAI

Infosys Ltd. reported declining Q3FY24 revenues at $4,663mn (in-line with our estimates), down 1.0% QoQ/YoY in constant currency terms. In USD terms, reported revenue was down 1.2% QoQ and flattish YoY. INR revenue for Q3FY24 stood at INR388.2bn, down 0.4% QoQ but up 1.3% YoY. Q3FY24 large deal TCV stood strong at $3.2 bn, with 71% being net new. PAT for the quarter came at INR61bn, down 1.7% QoQ and 7.3% YoY. EPS for the quarter came in at INR14.8.

* Conservative revenue guidance for FY24E: The quarterly revenue was affected by seasonal industry trends, resulting in a 1% decline in constant currency terms. Looking forward, growth is anticipated in the manufacturing, energy utilities, and life sciences sectors. However, the financial services and technology segments are grappling with challenges in the market. Geographically, the North America business is affected, whereas the European business is showing growth. In response to the constraints on digital transformation initiatives and limited discretionary spending, decision-making processes have slowed down, adversely affecting Infosys's overall business volumes. As a strategic response, the management has revised the revenue guidance for FY24E to 1.5-2.0% in constant currency. Management is observing strong traction in GenAI programs by leveraging its Topaz capability.

• Acquisition: Infosys has revealed its acquisition of InSemi, a prominent semiconductor design and embedded services provider for INR2.8bn. The completion of the deal is contingent upon meeting customary closing conditions and is expected to be finalized during Q4FY24. This strategic investment serves to enhance Infosys' Engineering Research and Development (R&D) capabilities, showcasing the company's ongoing dedication to collaborating with global clients in co-creating solutions to facilitate their digital transformation journey.

• Margins to remain range bound: In Q3, operating margins stood at 20.5%, experiencing a sequential decline of 70 bps. This decrease was influenced by factors such as the wage hike implemented from November 1st and an additional impact of $30mn related to the Mc Camish incident, impacting the balance between revenue and costs. Despite these challenges, the management is actively pursuing cost optimization measures. The guidance for a comfortable operating margin band of 20-22% has been provided for the FY24E. The company is directing its attention towards GenAI initiatives and is optimistic that securing large deals will contribute to margin improvement.

• Headcount dropped to 3,22,663: In Q3, the attrition rate decreased to 12.9% vs 14.6% in previous quarter, while the overall headcount was reduced by 6,101 employees, which includes reduction in S/W professionals by 5,785 and reduction in sales and support by 316 employees. The total headcount in Q3FY24 stood at 3,22,663 compared to 3,28,764 in Q2FY24.

• Valuation: The company is concentrating on securing substantial deals to propel further growth. The heightened adoption of next-generation artificial intelligence, such as TOPAZ and Cobalt cloud, is anticipated to generate long-term value for the business. The management is actively engaged in cost optimization efforts with the aim of enhancing margins and ensuring financial efficiency. We expect Revenue/EBIT/PAT to grow at a CAGR of 7.7%/11.7%/11.4% respectively over FY23- FY26E. We maintain our ADD rating with a revised target price of INR1,625 implying a PE of 24x (unchanged) on FY26E EPS of INR80.4.

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