Maintain BUY on Infosys - Decade-best Q1 - HDFC Securities

Mr. Apurva Prasad, Institutional Research Analyst, HDFC Securities and Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities

We maintain BUY on Infosys (INFY), following the decade best Q1 growth and a strong growth outlook. Revenue growth guidance for FY22E was increased to 14-16% CC (12-14% earlier) and the EBIT margin band was maintained at 22- 24% (despite the near-term supply crunch). INFY's growth trajectory remains strong, supported by (1) a strong deal pipeline (higher QoQ), release in pent-up demand to restart the delayed projects, and sustainable improvement in large deals (USD 9.8bn TTM new large deal wins); (2) momentum across verticals - BFSI (nine large deals in Q1 vs six in Q4), retail, manufacturing, life-science and utilities, notwithstanding the lower net-new bookings; (3) structural operational pivots of offshoring and utilisation mitigating the near-term impact from higher sub-contracting; (4) uptick in fresher onboarding (35k in FY22 vs. 25k planned earlier and 21k in FY21) towards demand fulfilment and offsetting the near-term attrition surge. We remain positive on INFY (top pick in tier-1 IT) with >13% EPS CAGR and >40% RoIC valuing the company at INR 1,730, based on 28x Jun-23E EPS.

Q1FY22 highlights: (1) INFY reported revenue growth of +4.8% QoQ CC and +16.9% YoY CC. Growth was broad based across the verticals, with digital revenue growing +9.7% QoQ in USD terms while core revenue remained flat QoQ; (2) EBIT margin declined 81bps QoQ to 23.7%, impacted by higher sub-contracting and hiring costs, offset by improved utilisation (+40bps QoQ) and FX tailwind (+10bps QoQ). (3) Wage hike is effective from Jul'21. (4) Out of the 22 large deals wins in Q1, nine were in BFSI, four each were in retail and E&U, two were in manufacturing and one each in communication/life science/hi-tech verticals. By region, fourteen deals were in the US, five in Europe, two in RoW and one in India. (5) Large deal TCV was at USD 2.5bn (+22% QoQ), of which 30% of the deals were net new. (5) INFY added 8,334 headcount in Q1 and plans to add 35k freshers in FY22.

Outlook: We have factored in USD revenue growth of 17.7/15.0/11.6% for FY22/23/24E with Q2FY22 at 5% QoQ. EBIT margin is factored in at 23/23.1/23.5% for FY22/23/24E. Valuations are at 26.3x FY23E (~3% discount to TCS) with FY21-24E EPS CAGR at 13%.

Shares of INFOSYS LTD. was last trading in BSE at Rs.1580.3 as compared to the previous close of Rs. 1576.9. The total number of shares traded during the day was 344456 in over 14762 trades.

The stock hit an intraday high of Rs. 1597.25 and intraday low of 1551.25. The net turnover during the day was Rs. 544910549.

Source : Equity Bulls

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