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Infosys reported mixed operating performance in Q2. Revenue grew 2.3% QoQ CC, ahead of our expectations; however, adjusting for higher pass-through and one-timers, it missed our estimates. Q2 revenue growth was impacted by spend reduction in some large clients, partially offset by ramp-ups of large deal wins in cost optimization and vendor consolidation. EBITM expanded 40bps QoQ to 21.2%, ahead of expectations, aided by the comprehensive margin expansion program launched last quarter. The company reported its highest-ever large deal TCV of USD7.7bn in Q2, where 48% of it was net new. Infosys has lowered its FY24 revenue growth guidance range to 1.0-2.5% CC YoY (earlier 1.0- 3.5%), implying -1.9% to flat sequential growth in H2. Management attributed revenue guidance revision to weak discretionary spending, delay in decision making and slower ramp-up of large programs. Management has retained its EBITM guidance of 20-22% for FY24. We have cut FY24-26E EPS estimates by ~1%, factoring in Q2 performance and implied weak H2 outlook. We maintain BUY with a revised TP of Rs1,680 (earlier Rs1,700) at 23x Sep-25E EPS.

Result Summary Infosys’ revenue grew 2.2% QoQ to USD4.72bn (2.3% QoQ/2.5% YoY in CC), above our estimate of USD4.6bn. Third-party items bought for service delivery expenses increased by 140bps QoQ, reflecting a jump in pass-through revenue, which supported revenue growth in addition to certain one-timers. EBITM expanded ~40bps QoQ to 21.2%, 20bps higher than our estimate of 21.0%. Margin expansion was aided by cost-optimization benefits comprising higher utilization and pricing (+50bps), revenue one-timers (+30bps) and rupee depreciation (+10bps), and it was offset by the increase in thirdparty costs along with salary-related and other costs (-50bps). Revenue growth in USD was led by Life Sciences (10.7% QoQ), Retail (7.1%), Manufacturing (3.6%), EURS (0.6%), while BFSI (flat), Communications (-0.4%), Hi-Tech (-1.6%) and Others (-0.8%) posted a weak performance. Among geographies, North America and Europe grew by 2.7% and 1.0% QoQ, respectively. Net headcount fell 2.2% QoQ. The company has announced an interim dividend of Rs18/share. What we liked: EBITM beat, strong deal intake and moderation in LTM attrition by 270bps QoQ to 14.6%. What we did not like: Weak implied growth in H2 and lower cash conversion (OCF/EBITDA at ~64%).

Earnings Call KTAs i) Management suggested that weak discretionary spending, slower decision making and lower ramp-up of deals continue to weigh on revenue conversion. Strong large deal signings and pipeline position the company well for growth acceleration, once all macros stabilize. ii) Weakness persists in BFSI (mortgages, asset management, investment banking, and cards and payments), Communication, Hi-Tech, and parts of retail. Growth challenges in the communication sector continue, coupled with increasing OpEx pressures, risk of inflation, high interest rates, and supply-demand imbalances. EURS clients are taking a conservative approach to discretionary spending and the trend is likely to continue through the year. iii) Infosys signed 21 large deals in Q2, including 4 mega deals split across geographies (12 in America, 8 in Europe, and 1 in ROW) and verticals (6 in retail, 5 in manufacturing, 4 in Communications, 3 in Financial Services, 2 in Life Sciences, and 1 in EURS). iv) Large deals signed in Q2 are likely to contribute materially from the end of FY24 as deal ramp-ups will take some time. The deal pipeline remains healthy even after record deal closures, albeit a tad lower. v) The company has announced wage hikes w.e.f. November 1, 2023. vi) Utilization has improved to 81.8% from 81.1% QoQ, with more scope for improvement. vii) Infosys is currently working on over 90 Generative AI programs and has trained 57,000 employees on the same.  

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