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Infosys Ltd. reported Q2FY24 revenues at $4,718mn (in-line with our estimates), up 2.3% QoQ and 2.5% YoY in constant currency terms while in USD terms, reported revenue was up 2.2% QoQ and 3.6% YoY. INR revenue for Q2FY24 stood at INR389.9bn, up 2.8% QoQ and 6.7% YoY. Q2FY24 order book stood strong at $7.7bn, up 185% YoY. PAT for the quarter came at INR62.1bn (+3.2% YoY) with EPS at INR15.01.

*Conservative revenue guidance for FY24E: Revenue growth was led Life sciences, Manufacturing and Retail segments with an increase of 18.4%, 12.6% and 9.2% YoY respectively. Among client geographies, Europe's revenue grew by 5.4% YoY, India's by 2.6% in CC terms, and North America's by 1% YoY in CC terms. Since the global market is uncertain, management is unsure of the recovery of demand. The management has cut its revenue guidance to 1-2.5% cc growth for FY24E. Management mentioned that there are constraints in payment, mortgages and investment banking in BFSI vertical. Operating in an environment where digital transformation initiatives and discretionary spending are limited, results in slower decision-making processes, which, in turn, is affecting Infosys's overall business volumes.

* Robust deal wins and adoption of Topaz: In Q2, Infosys secured a total of 21 large deals, which included 4 mega-deals. The combined total contract value (TCV) of these large deals amounted to $7.7bn, with an impressive 48% representing net new business. These deals were distributed across various sectors, with 6 in Retail, 5 in Manufacturing, 4 in Telecom, 3 in Financial services, 2 in Life sciences, and 1 each in Technology and the URS vertical. The adoption of Topaz, a generative AI capability set, is proving to be valuable for the company. Interest in Gen-AI is on the rise, and clients are actively considering Topaz solutions to modernize their enterprises, as well as to refactor, reengineer, and deploy code.

* Margins to remain range bound: In Q2, the operating margins reached 21.2%, marking a sequential increase of 40bps, which brings the H1 margins to 21%. The sequential increase in operating margins can be attributed to various factors i.e. 0.5% improvement from cost optimization benefits, which includes high utilization and pricing adjustments; 0.3% boost from one-time revenue events and 0.1% contribution from UP (User Productivity) depreciation. However, these gains were partially offset by a 0.5% increase in costs related to third-party expenses, salaries, and other items. The management has guided for a comfortable operating margin band of 20-22% for FY24E, focusing on cost optimization.

* Valuation: Significant large deal wins lay a robust foundation for the company’s future growth. The increasing adoption of the Generative AI solution, Topaz, is playing a crucial role in delivering consistent value and expanding market presence. Major deal wins and focus on cost optimization boosts confidence in the long-term growth prospects. We have introduced FY26E and expect Revenue/EBIT/PAT to grow at a CAGR of 6.2%/10.1%/9.7% respectively over FY23-FY26E. We maintain our ADD rating with a revised target price of INR1,655 implying a PE of 24x (unchanged) on FY26E EPS of INR76.9. 

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