Weathering the storm - Infosys - Q4FY20 Result Review - HDFC Securities

Infosys (INFY) delivered rev/margin below estimates in 4Q. While near-term performance will be marred by demand dent across verticals, subsequent recovery will be supported by (1) Strong growth in digital (42% of rev), (2) Resilience in large deal wins (bookings tracking well), (3) Market-share gains from vendor consolidation, and (4) Operational prudence & favourable onsite supply metrics. Maintain BUY with TP of Rs 680, at 16x FY22E EPS.

INFY's revenue stood at USD 3,197mn, -0.8/+6.4% QoQ/YoY CC and FY20 revenue growth stood at 9.8% CC (vs. 9% in FY19), tad short of its 10-10.5% CC FY20 guidance. FY21 guidance was not provided on economic uncertainty and COVID-19 impact in 4Q rev stood at USD 32mn or -1% QoQ (~USD 20mn supply-related impact and ~USD 10mn demand impact). Retail (NorthAm), Communications (Europe) and Hi-tech vertical outperformed sequential performance, offset by QoQ decline in Mfg, Life-science, BFSI, E&U & Communication (NorthAm).

TCV of large deal bookings in 4Q was USD 1,646mn across 12 deals and 56% of the TCV were net-new wins. INFY's large deal TCV in FY20 (USD 9bn) has grown at 44% as compared to 23% growth for TCS' total deal TCV. INFY's net-new wins was the highest in 3-qtr with deal closures even towards the turbulent quarter-end.

Operating performance was lower 75bps QoQ at 21.2% EBIT% on (1) COVID-19 related supply-demand impact (-90bps QoQ), (2) Visa expense (- 40bps), and (3) Higher G&A (CSR); offset by INR depreciation benefit (+50bps) and Travel cost & other efficiencies (+50bps). INFY has increased its cost optimisation focus further using a combination of delayed on-boarding, deferral in hikes, continuity in performance-linked involuntary attrition and other recurring cost optimisation modes (automation, offshoring, pyramid rationalisation).

Valuation and view. Despite the near-term grind on account of COVID-19 disruption, subsequent improvement in growth trajectory is premised on (1) Deal trends (stronger growth in TCV in FY20 as compared to TCS at 44%), (2) Vendor consolidation gains vs. weaker incumbents (including large global), supported by delivery efficiency and balance sheet strength (USD 3.6bn net cash), and (3) Strong digital offerings (32% YoY growth in Digital even in a soft 4Q). Steady onsite utilisation and availability of full stack onsite delivery centres (invested over last 3 years) will support increase in operational rigour, mitigating the impact from operating de-leverage in FY21. We have factored USD rev/APAT decline at 2/5% for FY21. FCF & payout yield at 5/4% support valuations (15.4x FY22E vs. ~17x historical avg), even as FCF generation improved in FY20 (FCF/APAT at 86% vs. 76% in FY19.

Shares of INFOSYS LTD. was last trading in BSE at Rs.633.05 as compared to the previous close of Rs. 652.9. The total number of shares traded during the day was 265764 in over 12818 trades.

The stock hit an intraday high of Rs. 646.5 and intraday low of 627.7. The net turnover during the day was Rs. 169693969.

Source : Equity Bulls

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