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Strong operating performance; early signs of recovery in BFSI

Infosys delivered a strong operating performance in Q1. Revenue grew 3.3% QoQ to US$4.71bn (3.6% in CC; adjusted for one-offs: 3.1% CC), coming ahead of our estimate. EBITM expanded by 100bps to 21.1%, beating our estimate. However, revenue and margin were aided by a one-off to the tune of 50bps and 40bps. The management has increased FY25 revenue growth guidance to 3-4% CC (from 1-3% earlier), considering the i) solid Q1 performance led by improvement in BFSI in North America, ii) strong large deal wins, and iii) contribution from the in-tech acquisition (~0.8% of revenue). Overall demand and the discretionary spending environment have largely sustained, but BFSI is seeing early signs of improvement in North America. We lift FY25-27E EPS by 1.4-1.8%, factoring in the Q1 performance and the in-Tech acquisition. Given the all-round beat in Q1, signs of recovery in BFSI, and strong deal intake, we upgrade the target multiple to 28x (from 25x) and retain BUY on Infosys, raising TP to Rs2,050/sh at 28x Jun-26E EPS.

Results Summary

Revenue grew 3.3% QoQ (3.6% QoQ/2.5% YoY in CC) to US$4.71bn, above our estimate of US$4.66bn. EBITM expanded by 100bps to 21.1%, beating our estimate of 20.8%. Margins were positively affected by normalization of the one-timers of Q4 (100bps), benefits from Project Maximus (80bps), and one-off benefits in the India business (40bps), being partially offset by headwinds emanating from higher variable pay, higher leave costs, etc (-120bps). Growth was led by BFSI (7.6% QoQ), Manufacturing (3.3%), Life Sciences (3.3%), EURS (2.5%), Communications (1.6%), and Others (17.5%), while Hi-Tech (-5%) and Retail (-0.3%) saw a decline. All geographies saw sequential growth, with North America, Europe, India, and ROW growing 2.1%, 2.6%, 45.5%, and 3.3%, respectively. Large-deal TCV of US$4.1bn remained healthy, with TTM large-deal-wins up 87.2% YoY. Total headcount declined 0.6% QoQ/6.2% YoY to 315,332. LTM attrition stood at 12.7% vs 12.6% in Q4FY24. What we liked: Operating performance beat, broad-based growth with BFSI returning to growth after 6 quarters, strong deal wins. What we did not like: Softness in Hi-Tech and Retail.

Earnings Call KTAs

i) Infosys has seen good volume recovery after many quarters, along with improvement in realizations, which has aided revenue growth. ii) FY25 revenue growth guidance implies 0.7% to 1.3% CQGR over Q2-Q4. iii) Infosys signed 34 large deals, with TCV of US$4.1bn; 58% of these are net new. iv) The management expects normal seasonality to play out in FY25, per guidance, i.e. H1 to be stronger than H2. v) BFSI is seeing early signs of demand recovery in the mortgage, capital market, card, and payment verticals, while mgmt. believes it is difficult to comment on sustainability with a one-quarter datapoint. vi) Large deal ramp-up led the growth in Communications, whereas the Hi-Tech vertical remains subdued. vii) EURS continues to be impacted by high interest rates and geopolitical conflicts, which are influencing spend patterns; pressure on discretionary spend persists. Deal pipeline remains strong. viii) Manufacturing growth was broadbased; pressure on discretionary spend persists. ix) The management expects margin improvement to be driven by Project Maximus (lean automation, pyramid, utilization, value-based selling). x) Nordic countries and Continental Europe are seeing good traction in large programs; constraints faced by local competitors in Germany are helping Infosys gain share. xi) The company plans to hire 15,000-20,000 freshers in FY25.

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