Maintain BUY on Infosys - Growth engine revving up - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities and Mr Vinesh Vala, Institutional Research Analyst, HDFC Securities

We maintain BUY on Infosys (INFY), following the beat on both revenue and margin and a strong growth outlook. Revenue growth guidance for FY22E was increased to 16.5-17.5% CC (14-16% 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 and sustainable improvement in NN large deals (USD 7.8bn TTM new large deal wins); (2) momentum across verticals - BFSI (five large deals in Q2), retail, manufacturing, life-science and hi-tech; (3) structural operational pivots of offshoring and utilisation mitigating the near-term impact from higher sub- contracting; (4) uptick in fresher onboarding (45k in FY22 vs. 35k planned earlier and 21k in FY21) to fulfil demand and offset the near-term attrition surge (+620bps QoQ). We remain positive on INFY (top pick in tier-1 IT) with >13% EPS CAGR and >40% RoIC, valuing the company at INR 1,995, based on 30x Dec-23E EPS.

Q2FY22 highlights: (1) INFY reported revenue growth of +6.3% QoQ CC and +19.4% YoY CC. Growth was broad-based across verticals, with digital revenue growing +10% QoQ in USD terms while core revenue remained flat QoQ. (2) EBIT margin declined 12bps QoQ to 23.6%, impacted by wage hike (-150bps), higher sub-contracting (-50bps) and hiring costs, offset by improved utilisation (+100bps QoQ) and FX tailwind (+30bps QoQ). (3) Attrition spiked to 20.1% and will remain at elevated levels. (4) Out of the 22 large deals wins in Q2, five each were in BFSI/ENU, three were in retail and manufacturing and three each were in communication/hi-tech verticals. By region, fifteen deals were in the US, six in Europe and one in RoW. (5) Large deal TCV was at USD 2.2bn (vs. 2.6bn inQ1), of which 37% of the deals were net new. (5) INFY added a headcount of 11,664 in Q2 and plans to add 45k freshers in FY22E.

Outlook: We have factored in USD revenue growth of 18.5/13.8/10.1% for FY22/23/24E with Q3FY22 at ~4% QoQ. EBIT margin is factored in at 23.4/23.2/23.5% for FY22/23/24E. Valuation is at 25.1x FY24E (~8% discount to TCS) with FY21-24E EPS CAGR at 13.9%.

Shares of Infosys Limited was last trading in BSE at Rs. 1715.50 as compared to the previous close of Rs. 1708.75. The total number of shares traded during the day was 495333 in over 20693 trades.

The stock hit an intraday high of Rs. 1784.05 and intraday low of 1698.25. The net turnover during the day was Rs. 860872760.00.

Source : Equity Bulls

Keywords

Infosys INE009A01021 INFY HDFCSecurities