Reliance Securities Report on Infosys - 2QFY23 Result Update - Strong Performance; Growth Leadership to Continue

Mr. Mitul Shah, Head of Research at Reliance Securities

Infosys - 2QFY23 Result Update - Strong Performance; Growth Leadership to Continue

Infosys' (INFO) 2QFY23 revenue came in at US$4,555mn, 0.6% below our estimate of US$4,581mn. The sequential CC growth stood at 4% vs. our estimate of 4.5%. EBIT margin stood at 21.5% (up 149bps QoQ /down 201bps YoY), 91bps above our estimate of 20.6%. Higher utilisation, forex gain and operating efficiency led to an improvement in overall operating margins. Net profit stood at Rs60.2bn (up 12% QoQ/up 11% YoY), 2.4% above our estimate of Rs58.8bn, due to higher EBIT margin. Large deal signings remained strong at US$2.7bn as against US$1.7bn in 1QFY23. Management's commentary on the demand environment and deal pipeline remained strong and guided for a 15-16% (vs. earlier 14-16%) revenue growth in CC terms and 21-22% EBIT margin range for FY23E. Though the management raised the lower range of revenue guidance, it cited uncertainty ahead in few pockets. We expect INFO to continue to gain market share in technology adoption. In view of strong deal wins, strong revenue guidance, healthy margin territory and attractive valuation, we maintain our BUY recommendation on INFO with a revised target price of Rs1,735 (vs. the prior Rs1,680), valuing the stock at an unrevised P/E multiple of 24x FY24E earnings.

Broad-based Growth across Verticals...

1) Digital revenue reported a CC growth of 31.2% YoY and contributed 61.8% of revenue. 2) INFO reported a broad-based revenue growth across verticals and geographies, and the growth was led by India and Europe, while manufacturing and Energy, Utilities, Resources & Services verticals outperformed. 3) Voluntary LTM attrition in IT services stood at 27.1%, compared to 28.4% in 1QFY23. Management indicated ~5% de-growth QoQ in attrition rate and expects the high attrition to moderate in 2HFY23. 4) During 2QFY23, the company added a net work force of ~10,032 employees.

Better Pricing, Stable SGA Costs and Favorable Forex Aid Margins

INFO reported 2QFY23 EBIT margin of 21.5% (up 149bps QoQ /down 201bps YoY), which was 90bps above our estimate. Margin expansion was led by revised pricing as well as operating efficiency. Favorable forex also acted positively during the quarter. We expect that majority of wage inflation is factored in 2QFY23, while declining attrition rate, lower sub-contracting expenses and stable SGA expenses would support margin expansion in 2HFY23, which would help meeting annual margin guidance. The management guided for 21-22% EBIT margin for FY23E as against earlier 21%-23%. Factoring better margins in 2QFY23 and margin expansion levers at place, we increase our EBIT margin estimates by 85bps/60bps for FY23E/FY24E and we estimate an EBIT margin of 22.4 and 23.1% in FY23E and FY24E respectively.

Higher Growth Guidance and Strong Deal Pipeline Support Valuation

We expect INFO to report a superior revenue 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. Considering strong deal wins, rising share of digital business (~61.8% of revenue), likely margin improvement ahead and a consistent capital allocation policy, we maintain our BUY recommendation with a revised 1-Yr target price of Rs1,735.

Source : Equity Bulls

Keywords

Infosys INFY Q2FY23 ResultUpdate RelianceSecurities