Infosys- Revenue guidance increased for FY23; Margin will be at lower end of the guidance band

What's buzzing:

Infosys has increased revenue growth guidance for FY23 to 14-16% in CC from earlier 13-15%. The company expects FY23 margins at lower end of guidance band of 21-23%

Context:

The company's revenues increased by 5.5% QoQ and 21.4% on YoY basis in CC terms. Dollar revenues increased by 3.8% QoQ to US$ 4,444 mn while Rupee revenues were up 6.8% QoQ to Rs 34,470 crore . It reported EBIT margin of 20.1% (vs our estimate of 20.8%) due to higher than expected employee expenses (on wage hike). Revenue growth was across geographies & verticals. In terms of geographies in CC term, revenue growth was led by Europe which grew by 33.2% YoY, followed by North America which grew by 18.4% YoY in CC terms. In terms of verticals the growth was led by BFSI, Retail, Communication, which grew 12.1%, 17.8% and 30.0% YoY in CC terms. Digital revenues now forms 61% of the revenue mix grew by 7% QoQ/32.8% YoY. The net addition continue to be strong at 21,171 employees taking its total headcount at 3,35,186. LTM attrition increased by 70bps QoQ to 28.4%. Large deal TCV however was down 26.1% QoQ/34.6% YoY to US$1.7bn.

Our Perspective:

The company's revenue performance was better than expected and increase in revenue guidance is encouraging. We do not expect further increase in revenue guidance considering weakness in some pockets like mortgage business in BFSI as well as in Retail. Margins are expected to recover in subsequent quarters however management indicated that margins will be at the lower end of the guidance band which reflects continued cost pressures . The pace of attrition is also slowing down which is expected to support margins in the medium term as attrition on quarterly annualized basis is down 500bps QoQ in Q4FY22 and further 100bps QoQ in Q1. Utilization has been on down-ward trend, but we believe as in when fresher’s which acquired in FY22 becomes billable, it is expected to improve going forward. The company maintained guidance of 50,000 fresher hiring in FY23 ( on the base of 84,000 fresher hired in FY22). Large deal TCV was under pressure ( was also visible in TCS), however management indicated that volatility may remain on quarterly numbers as it contains large deals of US$50mn+. We baked in 13.9%/11.5%/13.8% Revenue/EBITDA/PAT CAGR over FY22-24E