Infosys - Double whammy of supply-side pressures and weak macro environment - ICICI Securities

Infosys (Infy) reported a weak 1.2% QoQ growth CC (I-Sec: 2.3%, cons: 3%) and 0.7% QoQ USD (I-Sec: 1.9%, cons: 2.6%). Growth was driven entirely by pass-through of Daimler deal. Margin performance was poor at 21.5% (I-Sec: 22.7%, cons: 23.2%), down 200bps QoQ and 300bps YoY. The walkthrough on margins is as follows: i) 0.6% impact from lower utilisation, ii) 1.6% impact due to client contractual provisions and iii) 1% due to visa and third-party costs. We would also like to note that manufacturing vertical (Daimler deal) accounted for >170bps of the 300bps YoY decline in EBIT margin. Infy has cut its margin guidance band to 21-23% from 22-24%.

Going forward, the headwinds on margins are: i) increase in travel, facility, communication expenses; ii) higher onsite/offsite wage revision; and iii) declining employee utilisation rates. Tailwinds are: i) pyramid optimisation, ii) improvement in Daimler profitability, iii) reducing sub-con costs, and iv) pricing power. In other words, we believe headwinds on profitability are high and tailwinds will be backended. We are therefore assuming margins of 22%/23% for FY23E/FY24E. Attrition (LTM-IT services) increased 220bps QoQ to 27.7% though management indicated that the quarterly annualised attrition is down 500bps QoQ. While the QoQ reduction in attrition is a positive, Q1FY23 being a post wage hike quarter will likely see elevated attrition. Further, we would like to highlight that Infosys EBIT in FY22 grew 13.7% YoY vs TCS which grew 14.1% YoY. For FY23, we expect this to continue with Infosys EBIT growth at 9.8% YoY vs 11.2% YoY for TCS.

We believe the revenue growth guidance of 13-15% YoY CC is aggressive in a weak macro environment; it implies a CQGR of 2.7-3.5% and limits upside to guidance. But consensus growth estimates are already at 16-17% YoY USD and we expect corresponding downgrades. We would also like to highlight Infy has posted softer growth in BFSI along with TCS. Infy's BFSI vertical growth stood at 12% YoY in Q4 with average of 21% YoY for past 4 quarters. TCV of deal wins was at US$2.25bn, up 7% YoY and down 11% QoQ (we do believe, going forward, we will witness softness in deal win momentum). TCV for full year (FY22) stands at US$9.5bn, down 32% YoY. Net new deal wins are down 60% YoY.

Our estimates largely remain intact and we believe there will be at least 5-7% of EPS cut in consensus estimates led by lowering revenue growth / margin forecasts. We do believe Infy is well positioned to gain market share and is suitably equipped for industry-leading growth. However, elevated margin pressures along with slowing revenue / TCV momentum in tandem with macro environment lead us to retain our REDUCE rating. We assign a multiple of 23x (earlier: 24x) on FY24E EPS of Rs68 to arrive at a fair value of Rs1,570 (earlier: Rs1,628). We forecast revenue growth of 13%/11% YoY USD for FY23E/FY24E with an EPS CAGR of 14% for FY22-FY24E.

Shares of Infosys Limited was last trading in BSE at Rs. 1748.65 as compared to the previous close of Rs. 1741.45. The total number of shares traded during the day was 201207 in over 10285 trades.

The stock hit an intraday high of Rs. 1759.45 and intraday low of 1732.25. The net turnover during the day was Rs. 351412970.00.

Source : Equity Bulls

Keywords

Infosys INE009A01021 INFY Q4FY22 FY2022 ResultUpdate ICICISecurities