IGI Logo

Strong Performance again…

Quick Pointers:

* Pick up discretionary spending in FS and traction in sub US$ 50 mn deals indicate demand recovery

* Guidance for FY25 increased further to 3.75-4.5% in CC terms (3-4% earlier)

INFY reported another strong quarter with revenue of US$ 4.9 bn, up 3.1% QoQ CC (in-line of PLe & above cons. est. of 2.9% QoQ CC). Manufacturing & Europe led growth in Q2; aided by In-Tech integration led the growth. EBIT margin was flat at 21.1% vs PLe & cons. est. of 40 bps & 30 bps improvement due to higher amort. & variable pay headwinds offset by project maximus gains & currency benefits. Lumpy nature of wins kept large deals wins at US$2.4 bn vs US$ US$ 4 bn in Q1. Strong H1 performance, deal pipeline, & traction in below US$ 50 mn deals has led to revision of revenue guidance to 3.75-4.5% CC growth while the margin guidance is maintained at 20-22%.

INFY reported another quarter of broad-based growth with continued momentum in the key verticals and geographies, part of the growth (0.8% QoQ) was led by In-Tech integration. The sub-segments within Fin Services have recovered meaningfully in Q2, partly aided by improving spends on the discretionary areas. However, the cost-savings remain a focused area for enterprise clients and get preferred over large-size transformation projects. Although the deal TCV was weak, the pipeline for the small size deals (< $50m) has witnessed double-digit growth in Q2. The improvement in the small size deals was broadly distributed across verticals and geographies, which should support the near-term leakages on missing larger-tenured mega deals. With robust H1 execution and improving revenue visibility through robust deal pipeline, led to further revise the upper-end of the guidance band by 50bps. The ask rate to achieve the upper-end of the guidance is flat QoQ, while taking into consider the Q3 furlough impact. We believe the revised band is achievable on the back of improving revenue profile across major US banks and recovering macro. Considering the factor above, we are revising our revenue growth upward by 50bps/30bps/40bps for FY25E/FY26E/FY27E.

However, the margin miss was discouraging with flat QoQ on account of amortization and variable pay. With muted growth anticipated in Q3 and Q4, and partial wage revision (for junior) scheduled in Q4 will have an incremental impact on margins. Having said that, the comprehensive margin expansion program (Project Maximus), pyramid rationalization, offshoring and automation would negate some of the margins impact. Considering the headwinds above and margins miss in Q2, we are cutting our margin estimates by 40bps each in FY25E and FY26E and 20bps in FY27E.

Valuations and outlook:

INFY has a robust play on the front-end offering and execute on the large-size transformation deals. With improving discretionary spends, we expect the global enterprises to resume their long-deferred discretionary programs, where INFY would be wining disproportionately among its peers on quality execution and full-stake offerings. We estimate USD revenues/earnings CAGR of 8.1%/12.1% over FY24-FY27E. The stock is currently trading at 24x FY27E, we are assigning P/E of 27x to FY27E with a target price of INR 2,260. We maintain BUY.

Above views are of the author and not of the website kindly read disclaimer