Buy Infosys Ltd For Target Rs. 1,300 by Motilal Oswal Financial Services Ltd
FY27 growth outlook softens Daimler deal to weigh on exit-growth; margins hold up despite pricing pressure
* Infosys (INFO) reported 2QFY27 revenue of USD5.1b, up 1.2% QoQ. In CC, it was up 1.2% QoQ, below our estimate of 1.8% QoQ. Adj. EBIT margin stood at 21%, in line with our estimate of 21.1%. Adj. EBIT rose 1.6% QoQ/10.4% YoY to INR103b (est. INR104b). Adj. PAT came in at INR78b, up 0.6% QoQ/ 6.2% YoY, below our estimate of INR81b.
* FY27 revenue growth guidance was lowered to 1-2% YoY in CC (vs. 1.5-3.0% earlier) and organic growth guidance was reduced to -0.5% to 0.5% (vs. - 0.2% to 1.3% earlier). Adj. EBIT margin guidance was maintained in the 20- 22% range. Large deal TCV stood at USD5.2b, up 44.4% QoQ/67.7% YoY. The book-to-bill ratio was 1.0x.
* For 1HFY27, revenue/adj. EBIT/adj. PAT grew 12.3%/12.9%/9.1% YoY in INR terms. In 2HFY27, we expect INFO’s revenue/adj. EBIT to grow 5.9%/4.6% YoY and adj. PAT to decline 0.6% YoY. We value INFO at 16x FY28E EPS with a TP of INR1,300, implying a 13% upside potential. Retain BUY.
Our view: Peer underperformance likely to continue
* Guidance cut points to weaker growth; underperformance vs. peers likely to continue: A confluence of factors such as weaker volumes, lower-thanexpected price increases, offshoring and the decision to walk away from a large European manufacturing deal has weighed on growth. INFO has cut its FY27 revenue growth guidance to 1-2% YoY CC from 1.5-3.0%, while organic growth guidance was reduced to -0.5% to 0.5% from -0.2% to 1.3%. We expect QoQ revenue decline in the next two quarters due to seasonality.
* The shift toward offshore delivery and the deal exit are expected to have a 1.8-2.0% impact on FY27 growth. We estimate revenue growth of 1.1%/1.9% YoY CC in FY27/FY28, and expect INFO to grow slower than HCLT, TCS and TECHM in both years, based on our estimates.
* Daimler deal creates 4Q exit uncertainty and will weigh on FY28 growth as well: The impact of exiting the Daimler deal is expected to be largely felt in 4Q, creating uncertainty around the exit growth rate in FY28. While the new mega deal should support growth in FY28, the timing and pace of ramp-up remain key monitorables. The CEO transition is a short-term overhang amid a weak growth environment and continued pricing pressure.
* Margins holding up but pricing pressure apparent; expect range-bound performance in the medium term: INFO maintained its EBIT margin guidance of 20-22%. However, competitive intensity has prevented the expected price increases, while wage hikes, acquisition amortization and softer seasonality are likely to weigh on margins in 2H. We estimate EBIT margins of 21% for FY27/FY28 both and expect margins to remain rangebound in the medium term.
* Deal wins a silver lining: Large deal TCV stood at USD5.2b, with 62% net new deals, including a USD2b+ mega deal expected to contribute over 1% to FY28 growth. AI revenue increased to 10.5% of revenue (8.2% in 1QFY27), up 29% QoQ. While deal wins and AI revenue provide some support, the key monitorable is whether these translate into better overall revenue growth.
Valuation and changes to our estimates
* We trim our FY27/FY28 EPS estimates by ~1.5%/2.0% to factor in lower FY27 organic growth guidance and continued pricing pressure from AI-led productivity deflation. While AI revenue continues to scale up, we believe productivity pass-through on the existing book of business will remain a nearterm headwind. Execution on deal conversion and pricing remains a key monitorable. We value INFO at 16x FY28E EPS and arrive at a TP of INR1,300, implying ~13% upside. Reiterate BUY.
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