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Steady performance; robust deal wins

Infosys Ltd provides information technology (IT) consulting and software services, including e-business, programme management and supply chain solutions. It also offers application development, product co-development, system implementation and system engineering services.

* In Q3FY24, revenue remained broadly flat (up 1.3% YoY) at Rs. 38,821 cr as higher growth in the manufacturing and life science segments was partially mitigated by a decline in the financial services and communication segments.

* EBITDA margin fell 90bps YoY to 23.5% on account of the McCamish cyberattack incident and salary hikes.

* The seasonally weak quarter has been further impacted by lower discretionary spends and lower demand for digital services, which we believe is temporary. Importantly, healthy deal wins and acquisitions would continue to support earnings performance in medium to long term. Hence, we upgrade our rating from HOLD to BUY on the stock with a rolled forward target price of Rs. 1,824 based on 25x FY26E adjusted EPS.

Muted sales growth on fall in finance, communication segments

Infosys’s revenue remained broadly flat (+1.3 % YoY) at Rs. 38,821cr, as growth in the manufacturing (+13.5% YoY), life science (+9.6% YoY) and other (+7.2% YoY) segments was partially mitigated by a 4% and 6.1% YoY decrease in the financial services and communication segments, respectively. Geography-wise, growth was led by the Rest of the world (+7.1% YoY) and Europe (+9.2% YoY), while growth in India and North America declined 1.9% and 4.7% YoY, respectively. Further, EBITDA decreased 2.5% YoY to Rs. 9,137cr, while EBITDA margin narrowed 90bps YoY to 23.5%. The impact of the McCamish cyberattack incident and salary hikes were partially mitigated by sustained cost minimisation efforts. Higher financial costs further impacted on the bottom line, which decreased 7.2% YoY to Rs. 6,113cr.

Key highlights

* The management narrowed revenue growth guidance for FY24 to 1.5-2% in constant currency terms from 1.0-2.5% earlier but has maintained the operating margin guidance at 20-22%.

* The company announced a definitive agreement to acquire InSemi, a leading semiconductor design and embedded services provider, for Rs. 280 cr.

* In Q3FY24, the company’s attrition rate declined further by 170bps QoQ to 12.9%.

Continued deal momentum

Healthy deal wins momentum continued with 23 large deals signed, including one mega deal. The company signed eight large deals in manufacturing, six in financial services, four in energy, utilities, resources and services, two in retail, one in communication and one in other verticals. The total contract value of the deal stood at USD 3.2 billion, with 71% being net new.

Valuation

Weak demand for financial service and communication segment coupled with caution outlook across other key sectors and lower discretionary spending are expected to impact the company’s short-term earnings performance. However, large deal wins are likely to drive earnings growth in the medium-to-long term. Sustained cost minimisation efforts will continue to limit any downfall in margins. Hence, we upgrade our rating from HOLD to BUY on the stock with a rolled forward target price of Rs. 1,824 using a target multiple of 25x FY26E adj. EPS.

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SEBI Registration Number: INH200000345