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Infosys reported a tad better-than-expected operating performance for Q3. Revenue declined 1.2% QoQ to USD4.66bn (1% in cc) due to weak discretionary spending, further accentuated by lower volumes because of higher furloughs. EBITM fell 70bps QoQ to 20.5% due to wage hikes (effective 1-Nov-23), cyber security incident partially offset by margin-improvement initiatives under Project Maximus, and currency benefits. Large deal TCV stood at USD3.2bn, with 71% net new (9MFY24 – large deal TCV of USD13.2bn, up 70% YoY; net new TCV of USD7.2bn, up 106% YoY). Infosys has tightened its FY24 revenue growth guidance to 1.5-2% CC (from 1-2.5%), implying -1.5% to 0.5% sequential growth in Q4. As per management, the demand environment is largely unchanged, with cost takeout and consolidation deals continuing to see traction. We expect growth to accelerate in FY25 on account of ramp-up of large deals, strong deal pipeline, and expected recovery in discretionary spending. We tweak FY24-26 EPS estimates by under 1%, factoring in Q3 performance. We retain BUY with an unchanged TP of Rs1,850 at 25x its Dec-25E EPS.

Results Summary

Infosys reported a revenue dip of 1.2% QoQ (down 1% QoQ in CC) to USD4.66bn in Q3, broadly in line with our estimate of USD4.64bn. Third-party items bought for service delivery increased further by 80bps QoQ/140bps YoY, reflecting increased contribution from pass-through revenue. EBITM declined 70bps QoQ to 20.5% compared with our estimate of 20.3%. Margins were impacted by wage hikes effective 1-Nov-23 (-70bps) and cyber security breach at Infosys McCamish (-60bps), partially offset by Project Maximus-led cost optimization (50bps) and currency benefits (10bps). Among verticals, the laggards were Retail (-5.1% QoQ), Life Sciences (-3.7%), Hi-Tech (-2.4%), Communications (-1.2%), and Financial Services (-0.1%), while EURS (+1.9%) and Manufacturing (+3%) reported growth. Europe continued to do well, with 5.2% QoQ growth, while revenue from North America declined 4.6% QoQ. Headcount declined 2% QoQ to 322,663. Deal wins were healthy at USD3.2bn (71% net new and 1 mega deal), with transformation deals remaining out of favor. What we liked: Strong deal intake, progress on margin-improvement initiatives under Project Maximus and moderation in LTM attrition to 12.9%. What we did not like: Continued weakness in North America, BFSI, Communication, and Hi-Tech.

Earnings Call KTAs

i) Clients remain cautious and focus more on cost-optimization programs. ii) The number of digital programs in the deal pipeline is low, whereas the number of cost takeout and vendor consolidation programs is relatively high. Further, GenAI has garnered significant interest and traction, despite lower revenue currently. iii) CME clients continue to face growth challenges, thus putting pressure on opex. Clients are focusing on conserving cash, leading to a delay in decision-making and project deferrals. iv) Manufacturing is witnessing good traction due to new deal wins and the ramp-up of large deals. While the budget remains largely stable, clients continue to find ways to channel run savings into newer areas like digital, cloud, data, and IoT. v) Cost takeout and vendor consolidation programs are driving spends in the retail segment. The deal pipeline remains strong, although the decision cycle stays long. vi) Budget discussions are currently underway and management does not see any material changes so far. vii) Infosys acquired InSemi Technology Services, a leading semiconductor design and embedded services provider, for a cash consideration of Rs2.8bn (EV/Sales: ~1.8x). viii) Utilization (ex-trainees) rose ~90bps QoQ to 82.7% in Q3 and management sees further scope of improvement. ix) Infosys signed 23 large deals in Q3, including 1 mega deal, split across geographies (10 in America, 9 in Europe, 3 in ROW, and 1 in India) and verticals (8 in Manufacturing, 6 in BFSI, 4 in EURS, 2 each in Communications and Retail, and 1 in Others).

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