Buy Infosys Ltd for the Target Rs 1,300 by Emkay Global Financial Services Ltd
Infosys (INFO) reported a mixed operating performance in 1Q, with revenue missing estimates, while margins remaining in line. Revenue grew 1.0% CC qoq, with ~1.1% contribution from M&A, well below our estimate of 2.2%. EBITM expanded by 10bps qoq to 21.1%, in line with our expectations. 1Q large-deal TCV remains healthy at $3.6bn, of which 61% was net new and vendor consolidation deals contributing 20% of the TCV. AI Services revenue was 8.2% of 1Q revenue and has been growing in double digits sequentially. Management has revised its FY27 revenue growth guidance to 1.5-3.0% CC (from 1.5-3.5% earlier), implying CQGR of 0.4-1.4% over 2Q-4Q. the revised guidance includes ~1.7% contribution from the Optimum Healthcare and Stratus acquisitions, hence indicating implied organic guidance of ~0.5% at the midpoint compared to ~2.2% earlier; the management attributed the organic guidance cut to the 1Q miss, the earlier softer-than-expected volume growth, one-off impact from program termination by a EURS client, drag from a European manufacturing client (>1% vs 0.75-1% earlier), increased AI-led productivity expectations weighing on realization, and cautious spending by clients amid uncertain macros. The management retains EBITM in the 20-22% band, despite headwinds from wage hikes, productivity pass-throughs, AI investments, and ~50bps impact from acquisitions, offset by Project Maximus and currency movement. INFO has announced leadership transition with appointment of Ashiss Kumar Dash as CEO Designate till 31-Mar-27, succeeding Salil Parekh as MD and CEO wef 1-Apr-27. We cut FY27-29E EPS by 0.9-3%, factoring in the 1Q miss and organic guidance cut. Considering undemanding valuation, we retain BUY and cut TP by ~4% to Rs1,300 from Rs1,350, at 16x Jun-28E EPS.
Results summary
Revenue grew 0.8% qoq (1.0% CC) to $5.0bn, lower than our estimate of 2.2% CC growth. EBITM expanded by 10bps qoq to 21.1%, in line with our expectations, on the back of tailwinds from currency (+70bps), Project Maximus (+20bps), benefit from acquisition amortization in 4Q (+50bps) and one-time cost benefits (+30bps) partially offset by investments in AI and S&M (-50bps), low margin M&A integration (-50bps), project termination (-40bps), and increase in other expenses (-20bps). Headcount was down 0.2% qoq to 328,062. What we like: strong large-deal intake, cash conversion (OCF/EBITDA 86%). What we do not like: Revenue miss, organic growth guidance cut
Variability across verticals in 1Q; BFSI and EURS to lead growth ahead
Sequential revenue growth was led by Lifesciences (+10.5% qoq; largely driven by the Optimum acquisition), EURS (2.4%), Manufacturing (0.8%), Retail (0.8%), Hi-tech (0.8%), and BFSI (0.5%), partially offset by the decline in Communications (-2.4%) and Others (-14.1%). The management expects BFSI and EURS to grow higher than the company average, Lifesciences to benefit on the back of the acquisition (Optimum Healthcare), while Communication and Retail would see challenges ahead.
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