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Infosys Ltd
IT - Software | NSE : INFY
Infosys is the leading IT services company catering to BFSI, retail, communication, manufacturing & hi-tech verticals. The company generates 58% of revenue from digital technologies. Infosys has a strong workforce of 314,000 across the globe. Geography wise, North America contributes 61.4% of revenue while Europe market contributes 25%. India and RoW contribute the rest. In terms of verticals, BFSI contributes 31.3% of revenue mix, followed by retail & communication, which contribute 14.3% and 12.8%, respectively. E&U, manufacturing, hi-tech, life sciences contribute the rest.
We turn positive on Infosys amid undemanding valuations (after recent correction in the stock i. e~30% from top) as we believe that US recession related fears and consequent slow down expectations in US market seem to be largely priced in. The company continues to focus on large deal TCV (grew 3x in FY18-22) and account expansion (US$100 mn clients increased from 20 in FY18 to 38 in FY22). The company has guided for 13-15% CC revenue growth. We expect Infosys to achieve the growth as per guidance, moderation in revenues in FY24 cannot be ruled out. Hence, we trim our FY23E, FY24E revenue numbers factoring in slowdown in FY24E.
We upgrade Infosys to BUY valuing it at ₹1,745 i.e. 26x PE on FY24E EPS.
In our last update released in October 2021 (link) we had opined that IT companies were likely to benefit in the medium to long term from pricing discipline albeit in a gradual manner. Our analysis was based on the demand supply mismatch that the companies were facing. IT companies had been incurring elevated employee expenses in terms of retention costs, increase in frequency of salary hikes, etc. It was also evident that subcontractor costs for IT companies were also inching up on account of travel restrictions globally.
On the demand side, the companies were upbeat and continued to maintain robust demand outlook due to continued momentum in deal wins. To fulfil the demand, they have started hiring at elevated levels. If we look at the hiring trend across the top companies, the companies have hired more employees in FY22 than in the last three years combined.
However, the recent correction in IT stocks could be an indication that the revenue growth in FY23 could be healthy but it may be in the slow lane from FY24 onwards due to possible recession in the US, which subsequently could lead to a reduction in tech spending from some of their biggest clients. In this context, LTI had given cautious commentary on the growth outlook in Q4, while other companies were still upbeat on demand. We believe that growth outlook, more colour on attrition in Q1FY23 is expected to set the tone for FY24 numbers.
As far as price hike is concerned, it has been a part of active discussions of companies with their clients and some companies are getting price hikes in a few pockets. However, any meaningful price hike is yet to come and will take some more time to reflect that in numbers.
With the recent correction in the stocks, we upgrade TCS, Infosys to BUY from HOLD. We value TCS at ₹ 3835, assigning 29x FY24EPS while we value Infosys at ₹ 1,745 assigning 26x FY24 EPS. We maintain BUY at our remaining two top picks i.e. Coforge & Persistent Systems with revised target prices of ₹ 4,550 and ₹ 4065 assigning 26x and 29x multiple on FY24 earnings, respectively.
| Particulars (₹ crore) | Amount |
|---|---|
| Market Capitalization | 597,081.5 |
| CC&E | 24,145.0 |
| EV | 603,742.2 |
| 52 week H/L (₹) | 1,733.0/1,220.6 |
| Equity Capital | 2,071.0 |
| Face Value (₹) | 5.0 |
| Particulars | FY19 | FY20 | FY21 | FY22 | 5 Year CAGR (FY17-FY22) | FY23E | FY24E | 2 Year CAGR (FY22-FY24E) |
|---|---|---|---|---|---|---|---|---|
| Net Sales | 82,676.0 | 90,791.0 | 100,472.0 | 121,641.0 | 12.2 | 138,526.5 | 153,744.1 | 12.4 |
| EBITDA | 20,890.0 | 22,268.0 | 27,890.0 | 31,492.0 | 8.4 | 34,435.5 | 38,987.1 | 11.3 |
| EBITDA Margins (%) | 25.3 | 24.5 | 27.8 | 25.9 | - | 24.9 | 25.4 | - |
| Net Profit | 15,411.0 | 16,595.0 | 19,351.0 | 22,111.0 | 6.2 | 24,683.6 | 28,485.1 | 13.5 |
| EPS (|) | 35.4 | 38.9 | 45.6 | 52.1 | - | 58.2 | 67.1 | - |
| P/E | 41.7 | 38.0 | 32.4 | 28.4 | - | 25.4 | 22.0 | - |
| RoNW (%) | 23.7 | 25.2 | 25.2 | 29.2 | - | 29.2 | 31.2 | - |
| RoCE (%) | 32.9 | 30.8 | 31.7 | 36.0 | - | 35.2 | 37.7 | - |
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