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Infosys Q2FY23 review – Looking for minimum 15% growth in CC for FY23, announces buyback of Rs 9,300 crore

ICICIdirect Research 17 Oct 2022 DISCLAIMER

What's Buzzing 

Infosys reported strong numbers on margins in Q2. The company has increased the lower end of the revenue guidance keeping upper end constant i.e. revenue guidance changed from 14-16% to 15-16% in CC. On EBIT margin guidance, it has reduced the upper end keeping lower end constant i.e. changed from 21-23% to 21-22% for FY23E. 


Revenues increased 4.0% QoQ and 18.8% YoY in CC terms. Dollar revenues increased 2.5% QoQ to US$4,555 million while rupee revenues were up 6.0% QoQ to Rs 36,538 crore. It reported EBIT margin of 21.5%, which was up 150 bps QoQ aided by i) +70 bps currency benefit, ii) +90 bps cost optimisation, iii) +40 bps lower sub-contractor costs while there was 40 bps impact on compensation related expenses. Revenue growth was across geographies and verticals. In terms of geographies in CC terms, revenue growth was led by Europe, which (25% mix) grew 28.5% YoY, followed by North America (62% of mix), which grew 15.6% YoY in CC terms. In terms of verticals, growth was led by BFSI, retail, communication, which grew 11.5%, 15.4% and 18.4% YoY in CC terms, respectively. Digital revenues now form 62% of the revenue mix and grew 3.9% QoQ, 25.6% YoY while core revenues also reported minor growth, which was a positive surprise. The net additions were a little softer this quarter at 10,032 employees taking its total headcount at 3,45,218. LTM attrition declined 130 bps QoQ to 27.1%. Large deal TCV came in strong as it grew 58.8% QoQ, 25.6% YoY to US$2.7 bn. 

Our Perspective 

The company’s large deal TCV number was strong and prompted it to increase revenue guidance for FY23. As per our calculation, the company need to report 5% CC growth (assuming 100 bps cross currency headwinds, 4% QoQ dollar revenue growth) each in the next two quarters to achieve 15% CC growth guidance for FY23, which indicates that seasonality may not be severe as in the past. It could also mean that we are looking at continued strong large deal TCV momentum, going forward. Same confidence was not visible on margins, which could be due to elevated fresher hiring target. Moderation of LTM attrition is a positive trend, which, we believe, is in line with their earlier commentary. Sub-contractor costs are also moderating as it is now 10.1% of sales vs. 11.3% last quarter. Net additions, however, were on the softer side and needs to pick up in subsequent quarters to support strong growth. We estimate 13.2%, 11.6%, 11.9% CAGR in revenue, EBITDA, PAT, respectively, in FY22-25E.

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