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Infosys Continues strong numbers on TCV revenue guidance increased further Q3FY23 review

ICICIdirect Research 13 Jan 2023 DISCLAIMER

What’s buzzing 

Infosys reported strong numbers in a seasonally weak quarter. TCV came in at US$3.3 billion (bn), up by 22% QoQ. Revenue guidance increased to 16-16.5% from 15-16% in CC term for FY23. 


Revenues increased 2.4% QoQ in CC (2.2% for TCS and 2.1% for HCL Tech IT services) and 13.7% on YoY in CC terms. Dollar revenues increased 2.3% QoQ to US$4,649 mn. In terms of geographies, in CC term, revenue growth was led by Europe, which grew 25.3% YoY while growth in North America was slower at 10.5%. In terms of verticals in CC terms, growth was led by Communication, Energy, manufacturing, which grew 14.0%, 15.2% and 29% YoY in CC terms while growth in BFSI moderated to 5.5% YoY in CC terms. The company reported flat margins sequentially to 21.5%; tailwinds were +40 bps currency, +70 bps cost optimisations while headwinds were (-30 bps) higher SG&A costs and (-80 bps) seasonality impact in terms of furloughs. Digital revenues now form 62.9% of the revenue mix, up 4% QoQ, 17.8% YoY while core revenues reported a minor decline on a QoQ basis. Net additions were softer this quarter at 1,627 employees taking its total headcount at 3,46,845. LTM attrition declined by further 280 bps QoQ to 24.3%. Large deal TCV came in strong as it grew 22.2% QoQ, 30.4% YoY to US$3.3 bn. The company has increased revenue guidance from 15-16% to 16-16.5% in CC terms. It has maintained the EBIT margin guidance at 21-22% for FY23E. 

Our Perspective

 The company’s revenue guidance implies that revenue growth could be around 1% in CC terms for Q4, which, we believe, is fair considering some seasonal as well as growth moderation impact there. The growth in the US market for the quarter was impacted by furloughs and the market is likely to recover in the next quarter as 25 out of large 32 deals it won during the quarter (which are part of TCV) are from the US market. The company indicated that profitability in the retail sector in the US is under stress. Hence, cost take out deal opportunity is visible there, which echoes commentary given by TCS. In Europe, it is facing slower client decision making in a few countries like Germany, the UK and Nordic countries. However, sectors like manufacturing, energy & utilities are doing strong in the geography and are likely to be growth drivers in the medium term. Vertical wise, in addition to the commentary given by the company in Q2, investment banking in the BFSI space is facing slower decision making but no incremental pain is visible in other verticals. On margins, we believe that 80 bps furlough impact is likely to recover in Q4 and we could see margin expansion there. The pricing environment is stable and could be a medium to long term growth driver along with moderation of attrition and pyramid optimisation, etc. We estimate 14.4%, 12.7%, 13.0% CAGR in revenue, EBITDA, PAT, respectively, over FY22-25E

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