Buy Infosys Ltd For Target Rs. 1,550 by Motilal Oswal Financial Services Ltd
Disappointing quarter; outlook worsens Mid-point of organic growth guidance cut by 170bp, new CEO announced
* Infosys (INFO) reported 1QFY27 revenue of USD5.1b, up 0.8% QoQ. In CC, it was up 1% QoQ, below our estimate of 2% QoQ. Adj. EBIT margin stood at 21.1%, below our estimate of 21.4%. Adj. EBIT rose 4.3% QoQ/15.4% YoY to INR101b (est. INR104b). Adj. PAT came in at INR77.6b, down 5% QoQ/up 12% YoY, below our estimate of INR80b.
* INFO has cut its organic CC growth guidance from ~1.25-3.25% earlier to (-0.2%) to 1.3% now. Adj. EBIT margin guidance was maintained in the 20- 22% range. Large deal TCV stood at USD3.6b, up 12.5% QoQ/down 5.3% YoY. The book-to-bill ratio was 0.7x.
* For 1QFY27, revenue/adj. EBIT/adj. PAT grew 14.0%/15.4%/12.3% YoY in INR terms. In 2QFY27, we expect INFO’s revenue/adj. EBIT/adj. PAT to grow 8.6%/7.4%/5.8% YoY. We value INFO at 14x FY28E EPS with a TP of INR1,170, implying a 12% upside potential.
Our view: Soft quarter reinforces FY27 growth concerns
* Steep guidance downgrade points to increasing pressure on growth: INFO has reduced its organic CC growth guidance from ~1.25-3.25% earlier to (- 0.2%) to 1.3%. At the top end, management assumes the macro environment gets better, but with soft volumes spilling over into 2Q, this is a significantly negative outcome. While macro and client-specific issues persist, we now expect INFO to underperform large-cap peers on growth.
* Productivity deflation not quantified but remains substantial: Management again did not quantify AI-led productivity deflation, though peers have pointed to an incremental 10-15% deflation (vs. the routine 10-15% productivity reductions built into the model). Thus, despite healthy deal TCV (USD3.6b) and a strong 61% net new mix, productivity pass-throughs continue to knock growth off. We expect this to continue, and hence believe deal TCV will become a less reliable indicator of revenue growth going forward.
* Demand environment continues to worsen: Management indicated that volumes were softer than expected and weaker than historical 1Q trends, with discretionary spending remaining selective and decision-making continuing to be elongated.
* Client-specific issues, including the 50bp impact from the EURS contract termination and continued weakness in the large European manufacturing client (>100bp headwind for FY27), further weighed on growth. While AI spending remains healthy, it continues to be directed toward modernization, cloud and productivity initiatives rather than incremental discretionary spending.
* CEO succession could introduce near-term uncertainty: INFO has appointed Mr. Ashiss Dash, a 31-year company veteran, as CEO-designate, succeeding Mr. Salil Parekh from 1st Apr’27. Over the past three decades, he has held leadership roles across delivery, account management, sales and vertical businesses. However, a leadership transition introduces near-term uncertainty until the market gains better visibility on the new CEO's execution priorities.
* Margin guidance maintained, though pressure likely to persist: INFO maintained its 20-22% EBIT margin guidance, despite factoring in wage hikes, AI investments, productivity pass-through and a 50bp acquisition-related headwind. Management expects these factors to be offset by Project Maximus, currency tailwinds and a 75-100bp reduction in onsite mix. We estimate EBIT margins at 21% for FY27E/FY28E each, though revenue growth remains the bigger monitorable.
Valuation and changes to our estimates
* We trim our FY27E/FY28E EPS estimates by ~2% to factor in lower FY27 organic growth guidance and continued pricing pressure from AI-led productivity deflation. While AI revenue continues to scale up rapidly, 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 14x FY28E EPS and arrive at a TP of INR1,170, implying ~12% upside. Reiterate BUY.
Miss on revenue and margins; FY27 guidance downgraded to 1.5%-3.0% (vs earlier 1.5%-3.5%), new CEO-designate announced
* USD revenue was up 0.8% QoQ at USD5.1b. In CC, it was up 1% QoQ, below our estimate of 2% QoQ growth.
* INFO appoints Mr. Ashiss Kumar Dash as New CEO designate (wef 1st Apr’27). He has been with INFO for 30 years and is currently EVP and Global Head – Services, Utilities, & Enterprise Sustainability.
* FY27 guidance has been reduced at the upper end by 50bp to 1.5-3.0% YoY cc (our expectation of 1.5-3.0% YoY cc organic). However, this guidance also includes incremental M&A contribution; and hence, the cut is higher than expected.
* In 1QFY27, Life Sciences/Energy grew 10.5%/2.4% QoQ, while Communications declined 2.4% QoQ. BFSI/Manufacturing/Retail remained flat QoQ.
* Adj. EBIT margin was at 21.1%, below our estimates of 21.4%. Adj. EBIT margin guidance was maintained in the 20-22% range.
* Adj. PAT was down 5% QoQ/up 12% YoY at INR77.6b (below our est. of INR80b).
* Employee count was flat QoQ at 328,062.
* Large deal TCV stood at USD3.6b, up 12.5% QoQ/down 5.3% YoY. The book-tobill ratio was 0.7x.
* LTM attrition was up 40bp QoQ at 13%. Utilization rose 190bp QoQ to 84.9% vs. 83% in 4Q (ex-trainees).
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