Infosys - 3QFY22 Result Update - Raise TP to Rs2,250 - Reliance Securities

Superior Execution Commands Premium Valuation

Re-rating to Continue; One More Revenue Guidance Upgrade

Infosys' (INFO) 3QFY22 revenue is at US$4.25bn, which is 200bps above our estimate of US$4.17bn. The sequential constant currency growth is at 7% vs. our estimate of 4.5% (consensus: 3.8%), driven by a broad-based growth across industries. EBIT margin stood at 23.5%, substantially 10bps lower and 20bps lower than our estimate of 23.7%, driven by a better-than-expected operating leverage, despite wage inflation amid very high attrition rate during the quarter. Net profit stood at Rs58.2bn, which is 5.5% below our estimate of Rs61.4bn, due to lower EBIT margin. Large deal signings remained strong at US$2.53bn as against US$2.15bn in 2QFY22. Management's commentary on the demand environment and deal pipeline remained strong. Infosys (INFO) upgraded its FY22 revenue growth guidance at 19.5-20% in CC terms vs. the prior 16.5-17.5%. Additionally, the company retained the EBIT margin guidance at 22-24%. We expect INFO to continue to gain market share in the current technology upcycle. We have revised the FY22E-FY24E EPS estimates by -2.5% to 2.2%. In view of strong transformational IT upcycle over next 4-5 years globally and company's outperformance, we reiterate our BUY recommendation and raise the target price to Rs2,250 (vs. the prior Rs2,120) and value the stock at 30x (earlier 28.5x) FY24E earnings.

Broad-based Growth Across Verticals; Attrition Spike In Line With Larger Peers

(1) Digital revenue reported a growth of 41.2% YoY and is at ~58.5% of revenue. (2) INFO reported a broad-based revenue growth across verticals and geographies, and the growth was led by Europe and manufacturing vertical. (3) Voluntary LTM attrition in IT services stood at 25.5%, compared to 20.1% in 2QFY22. Management expects the high attrition to stabilize in next quarter and would ease out in FY23. 4) During 3QFY22, the company added a net work force of ~12.4k employees. It targets to hire 55k (vs. the earlier 45k target) graduates in FY22.

Execution Surprise Led by Operating Efficiencies

INFO reported 3QFY22 EBIT margin of 23.5% (-10bps QoQ), which was in line with consensus, as operating efficiencies (50bps), lower SG&A cost (40bps) and Fx gain (20bps) which largely offset wage inflation (80bps) and utilization decline (40bps). It also reflects decent pricing power despite wage hike amid record high employee retaining cost. We expect a limited margin upside for FY22 due to a higher SG&A cost (higher attrition and resumption of offices) and accelerated hiring over the next two quarters. We estimate an EBIT margin of 24-24.5% over FY22E-FY24E.

Superior Execution Commands Premium Valuation

At CMP, INFO trades at 28.6x/25.1x FY23E/FY24E EPS, which is at 5% discount to the larger peer TCS. Going forward, we expect INFO to report a superior growth vs. the top 4 Indian IT peers, driven by a surge in large deals and acceleration in the digital revenue share. Also, a stable management keeps INFO in a better position to make bolder decisions and pursue aggressive market share gain. We believe the stock deserves a rerating, considering the industry-leading double-digit revenue growth, rising share of digital business (58% of revenue), elevated EBIT margin levels vs. pre-Covid levels and a consistent capital allocation policy. Therefore, we increase our target valuation multiple from 28.5x to 30x. We retain our BUY recommendation with a revised 12-month target price of Rs2,250 (earlier Rs2,120), valuing the stock at 30x FY24E earnings.

Shares of Infosys Limited was last trading in BSE at Rs. 1928.20 as compared to the previous close of Rs. 1897.00. The total number of shares traded during the day was 421856 in over 25093 trades.

The stock hit an intraday high of Rs. 1932.95 and intraday low of 1879.00. The net turnover during the day was Rs. 807788416.00.

Link to the report

Source : Equity Bulls

Keywords

Infosys INE009A01021 INFY Q3FY22 ResultUpdate RelianceSecurities