Infosys - Stellar execution in both revenue & margin continues - ICICI Securities

As enunciated in our sector note (link), we believe, in addition to industry-leading revenue growth (within large caps), our thesis around Infosys is also anchored around strong headroom for margin expansion from FY20 levels. Company has commendably been able to demonstrate the same in H1FY21 by delivering margin expansion of ~300bps to 24.1%. Infosys upgraded its guidance for FY21 revenues (by 2-3% in FY21E CC growth) and margin (23-24% in FY21E). Backed by its strong deal win momentum (large deal TCV win at US$3.1bn including Vanguard), we expect Infosys to lead the tier-I IT segment on organic revenue growth (FY20-FY23E sales CAGR: ~8.4%). Over FY18-FY20, EBIT margins contracted ~300bps to 21.3% led by: 1) planned catch-up in investments, 2) attrition interventions, and 3) large deal ramp-ups. As these investments normalise and back-ended productivity benefits kick in, we expect EBIT margins to bounce back by FY22E. Company also had a healthy cash conversion with FCF/NI at ~103% in Q2FY21. Maintain BUY with a revised DCF-based target price of Rs1,400.

- Strong beat in both revenue and margin: Infosys reported a stellar quarter in light of the current environment with a QoQ revenue growth of 4% in CC terms and margin of 24.5%. Growth in Q2FY21 was led by Financial Services (7.8%, QoQ US$). Retail (10.6%), Hitech (11%) and Lifescience segments (7.7%). Margin expanded by 270bps sequentially to 25.4%, with accretion primarily coming from increase in RPP (100bps), increased utilisation (up by 80bps), and improvement in offshore mix (80bps). Company has decided to provide hikes and promotions to employees from 1st Jan'21 with a one-time incentive payment to junior employees.

- Deal wins remain strong, especially in context of the tough environment. Large deal TCV was US$3.1bn in Q2FY21 including Vanguard, with new deals accounting for 84% of total deals in Q2FY21. The company signed 16 large deals in Q2FY21 with 11 from Americas and four from Europe.

- Revenue guidance and margin guidance upgrade: Infosys upgraded its revenue growth guidance to 2-3% in CC terms from 0-2% previously on the back of ramp-up in large deals and healthy outlook on the pipeline. Further, the company also increased its margin guidance to 23-24% from 21-23% earlier, aided by cost-saving measures (rationalisation of discretionary spend, savings in employee cost, pyramid optimisation, etc). However, as Infosys starts with its hike and promotion cycle, parts of these temporary margin benefits should go away in the coming quarters.

- Maintain BUY. Solid supply side execution (99% employees working from home; timely deal ramp-ups through remote onboarding even of rebadged employees, etc.), strong balance sheet (US$4.5bn net cash) and robust capabilities in digital (47.3% of revenues), up 25.4% YoY in CC terms in Q2) should ensure that Infosys gains market share through vendor consolidation and transformative cost takeout initiatives for clients (as evidenced in Vanguard deal win). Consistent growth outperformance (vs TCS) over the previous six quarters went under-appreciated till recently, given the unfortunate controversy around whistle-blower issue. However, as investor interest is back to the fundamentals and given our expectation of continued outperformance, we foresee a compelling case for multiple catch-up (currently at ~20% discount vs the historical average of 14.5%, vis-a-vis TCS). Maintain BUY with a revised target price of Rs1,400.

Shares of INFOSYS LTD. was last trading in BSE at Rs.1108 as compared to the previous close of Rs. 1136.1. The total number of shares traded during the day was 2663595 in over 41182 trades.

The stock hit an intraday high of Rs. 1185 and intraday low of 1093. The net turnover during the day was Rs. 3032792678.

Source : Equity Bulls

Keywords