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  • CMP : 1,602.0 Chg : 9.10 (0.57%)
  • Target : 1,730.0 (16.89%)
  • Target Period : 12-18 Month
Result Update

13 Jan 2023

Strong TCV bookings; revenue guidance increased further

About The Stock

Infosys Ltd (Infy) is one of the leading IT players catering to BFSI, retail, communication, manufacturing & hi tech verticals.

  • The company generates >58% of revenues from digital technologies
  • Dividend payout (>80%), margins (>20%) and RoCE (>31%) key positives
Q3FY23 Results

Infosys reported strong numbers in a seasonally weak quarter.

  • Revenue grew 2.4% QoQ and 13.7% YoY in CC terms
  • EBIT margins were flat at 21.5% sequentially
  • Signed 32 Large deal with TCV of US$3.3 billion (bn), up 22.2% QoQ
What should Investors do?

Infy’s share price has grown by ~2.8x over the past five years (from ~₹ 526 in January 2018 to ~₹ 1,480 levels in January 2023).

  • We maintain BUY rating on the stock
Target Price and Valuation

We value Infosys at ₹ 1,730 i.e. 23x P/E on FY25E EPS.

Key Triggers for future price performance
  • Differentiated digital and cloud capabilities to drive growth
  • Growth remained broad-based and deal momentum robust, with digital transformation rapidly scaling up across verticals and regions
  • Infosys to post industry leading revenue growth (14.4% CAGR in FY22-25E)
  • Double-digit return ratios, strong cash generation and healthy payout
Alternate Stock Idea

Besides Infosys, in our IT coverage we also like TCS.

  • Strong organic growth, consistent financials, industry leading margins and healthy capital allocation policy prompt us to be positive on the stock

 

  • BUY with a target price of ₹ 3,780

Particulars

Particulars (₹ crore) Amount
Market Capitalization 649,550.8
Cash and Investment 24,145.0
EV 605,017.6
52 week H/L (₹) 1,985.0/1,307.0
Equity Capital 2,073.0
Face Value (₹) 5.0

Price Chart

Recent Events & Key Highlights

  • 32 large deal win of TCV US$ 3.3 bn
  • Key Risk: i) Lower than guided revenue, ii) lower than guided margin

Research Analyst

Sameer Pardikar
sameer.pardikar@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E FY25E 3 Year CAGR (FY22-FY25E)
Net Sales 90,791.0 100,472.0 121,641.0 12.2 148,131.9 166,123.0 181,958.2 14.4
EBITDA 22,268.0 27,890.0 31,492.0 8.4 36,082.6 41,198.5 45,125.6 12.7
EBITDA Margins (%) 24.5 27.8 25.9 - 24.4 24.8 24.8 -
Net Profit 16,595.0 19,351.0 22,111.0 6.2 25,768.0 30,031.3 31,901.1 13.0
EPS (|) 38.9 45.6 52.1 - 60.7 70.8 75.2 -
P/E 38.0 32.5 28.5 - 24.4 21.0 19.7 -
RoNW (%) 25.2 25.2 29.2 - 30.1 32.3 32.1 -
RoCE (%) 30.8 31.7 36.0 - 36.2 39.1 39.2 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

  • In a seasonally weak Q3 Infosys reported strong revenue numbers reporting revenue of US$4,659 mn, up 2.3% QoQ, 9.6% YoY. In CC terms, the company reported growth of 2.4% QoQ & 13.7% YoY. In rupee terms, Infosys reported revenue of | 38,318 crore, up 4.9% QoQ & 20.2% YoY
 
  • Digital revenues (62.9% of the revenue mix) grew 4% QoQ to US$2,930 mn while Core revenues (37.1% of the revenue mix) declined by 0.5% QoQ. In CC terms, Digital revenue grew 21.7% YoY while Core revenue grew 2.4%
 
  • Geography wise (in CC terms on a YoY basis), Europe region (25.8% of mix) reported a second successive quarter of 25%+ growth with growth of 25.3% while the North America market (62% of mix), impacted by furlough, reported growth of 10.5%. RoW region reported growth of 11.9% while India revenue declined 5.4%

 

  • Vertical wise (in CC terms on a YoY basis), growth was led by Manufacturing and Energy, Utilities, Resources & Services sector (EURS), which sustained its growth momentum reporting strong growth of 36.8% & 25.9, respectively, while Retail, Communications, Hi-Tech and Lifescience reported growth of 12.7%, 12.7%, 10.4% & 5%, respectively. Financial Services segment (29.3% of the mix) reported growth of 5.5%. The company indicated that financial services segment was impacted by furloughs & certain contract closure issues
 
  • Despite the revenue growth in a furlough impacted quarter the company reported flat EBIT margin of 21.5% compared to last quarter. Infosys indicated that margin tailwinds were currency benefit (+30 bps) & cost optimisations via lower sub-contractor cost (+70 bps) were negated by the higher SG&A expenses ( -30 bps) and furlough impact ( -80 bps), resulting into sequentially flat margins

 

  • During the quarter, Infosys won 32 large deals with a TCV of US$3.3 bn, up 22.2% QoQ. The company indicated that 36.3% of the TCV was of net new deals. The TCV wins were highest since Q4FY21 and indicated that its demand pipeline remains strong despite a challenging environment. Infosys indicated that it is witnessing increased traction in cost optimisation & automation pipeline. It also indicated that the cloud demand remains strong

 

  • The company’s 32 large deals were won across the following segment: i) seven in retail; ii) six each in Financial services & Communication, iii) five each in EURS & Manufacturing, iv) two in Lifescience & v) one in Hi-Tech while geography wise the split was: i) 25 in US, ii) five in Europe and iii) one in RoW

 

  • On the back of strong TCV win in the last few quarters & healthy demand pipeline the company increased its revenue guidance for FY23 to 16-16.5% from earlier guidance of 15-16%. Infosys, however, has maintained its EBIT margin guidance of 21-22%

 

  • On the demand outlook, as far as macro impact is concerned, the company said it is seeing some incremental impact in investment banking sub-vertical in the BFSI space in addition to impact visible in the mortgage sub-vertical, which it mentioned during the Q2 call. Infosys maintained that the pain points in some pockets of Retail, Hi-Tech and Telecom continued but they are at levels similar to Q2 and no incremental impact is visible in these verticals apart from BFSI. The company indicated that due to weak macros, opportunities for cost take out programs are increasing but the clients also continue to spend on transformation deals. Hence, the near to medium term opportunities looked balanced. Subsequently both these programs are likely to drive the revenue growth equally

 

  • FY24 outlook: The company indicated that it has a strong pipeline for FY24 and it does contain good proportion of large deals. The large deals also have a good combination of cost take out deals as well as large automation deals. Infosys continues to win transformation deals due to its Cobalt based capabilities while cost take out deals are being won due to its world class automation capabilities. The company also indicated that clients are likely to fund its transformation deals from the cost saving outcome through cost take out deals. Hence, it is playing on both legs of the revenue growth. The company also indicated that it has an opportunity to earn higher margin in cost take out deals as these are more milestone based

 

  • The company also mentioned that due to weak macros the clients are also looking to cut down the number of vendors. Hence, vendor consolidation is being evaluated by the clients. Infosys also mentioned that in several discussions with clients, which have six to seven vendors currently, they are looking to cut the count to may be one or in some cases two or three. The company mentioned that it is likely to be the beneficiary of client consolidation due to its end to end offering

 

  • Infosys indicated that strong growth in the Europe market for the quarter is also a function of large programs, which were running in this region in the last 18-24 months. The company indicated that a few pockets in Europe are seeing some growth moderation, which includes Germany, UK, some Nordic countries, etc. Manufacturing, energy & utilities in Europe is doing well and is expected to continue performing better in the near term. US market growth for the quarter was impacted by furlough

 

  • The company mentioned that US market growth, going forward, is likely to rebound as out of 32 large deals that t won in Q3, 25 were from the US geography. Infosys mentioned that the pipeline remained strong across these geographies. The company also added that retailer’s profitability across US has been under pressure recently. Hence, it has created opportunities to win cost take out programs in the near term. Infosys indicated it is difficult to give any indication of the large deal TCV in future as sometimes it may look higher when it won disproportionate large deals

 

  • The company indicated the pricing environment is much better compared to previous quarters. It is expected to be a margin lever in the medium to long term

 

  • Infosys, during the quarter, added 1,627 net employees taking the total employee strength to 346,845 employees. The net addition was lowest in nine quarters. Utilisation excluding trainees declined by 190 bps to 81.7% due to furlough impact

 

  • The company reported that its LTM attrition declined by 280 bps QoQ to 24.3 while its quarterly attrition declined by 600 bps QoQ. Infosys indicated that it expects attrition to moderate further, going forward

 

  • The company during the last quarter had approved a share buyback program of | 9,300 crore at maximum buyback price of | 1,850 per share. Since December 7, 2022, it has bought back 31.3 mn shares worth | 4,790 crore at an average price of ~| 1,531 per share
 
Variance Analysis
 
   Q3FY23   Q3FY23E   Q3FY22   YoY (%)   Q2FY23   QoQ (%)   Comments 
Revenue 38,318 37,751 31,867 20.2 36,538 4.9 Reported revenue growth of 2.4% QoQ in CC terms
Employee expenses 25,436 25,120 20,516 24.0 24,383 4.3  
               
Gross Profit 12,882 12,631 11,351 13.5 12,155 6.0  
Gross margin (%) 33.6 33.5 35.6 -200 bps 33.3 35 bps  
Selling & marketing costs 1,611 1,572 1,325 21.6 1,486 8.4  
G&A expenses 1,904 1,841 1,643 15.9 1,767 7.8  
EBITDA 9,367 9,218 8,383 11.7 8,902 5.2  
EBITDA Margin (%) 24.4 24.4 26.3 -186 bps 24.4 8 bps  
Depreciation 1,125 1,035 899 25.1 1,029 9.3  
EBIT 8,242 8,182 7,484 10.1 7,873 4.7  
EBIT Margin (%) 21.5 21.7 23.5 -198 bps 21.5 -4 bps EBIT margin were flat QoQ with the tailwinds of 30 bps currency benefit & 70 bps of lower sub-contractor cost offset by the headwinds of 30 bps of higher SG&A spend and 80 bps impact of seasonal weakness & furlough impact
Other income 689 600 459 50.1 518 33.0  
PBT 8,931 8,782 7,943 12.4 8,391 6.4  
Tax paid 2,345 2,477 2,121 10.6 2,365 -0.8  
Reported PAT 6,586 6,301 5,809 13.4 6,021 9.4  

Disclaimer

ANALYST CERTIFICATION

I/We, Sameer Pardikar, MBA, Sujay Chavan, MMS, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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Pankaj Pandey

Head – Research

pankaj.pandey@icicisecurities.com

 

 

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

 

 

research@icicidirect.com
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