HDFC Securities Institutional Research Desk - Report on Infosys - Strong deal velocity - Maintain BUY

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

Infosys - Strong deal velocity

Infosys (INFO) posted in-line revenue performance and a beat on margins in Q2FY23. Revenue growth of 4% QoQ and 18.8% YoY CC and strong large deal bookings of USD 2.7bn led to a change in revenue guidance to 15-16% CC for FY23E (vs. 14-16% guided earlier). Key positives in INFO's Q2 were (1) net-new large deal bookings for Q2 at USD 1.4bn (H1FY23 net-new large deal bookings up 47% YoY) driving growth visibility for H2; (2) digital at 61.8% of revenue growing 31% YoY CC (although sequential deceleration), including Q2 cloud revenue at USD 1bn+; (3) positive commentary on deal pipeline (higher than last two quarters) reflecting deal funnel replenishment despite prevalent macro; (4) net headcount addition of 10k or ~3% in Q2 with 40k fresher addition in H1 and the company expected to surpass annual fresher intake plan; and (5) operational improvement led by sub-contracting optimisation and better large contract profitability (improvement in manufacturing vertical margin) increasing the certainty to hit 21%+ EBITM for FY23E with added levers (utilisation, rate card in digital). Nonetheless, management cautioned on select verticals (communication & hi-Tech, mortgage and retail sub-segment) citing instances of slower decision cycle. Maintain BUY on INFO (top pick in tier-1 IT), with a TP of INR 1,790, based on 26x June-24E EPS.

Q2FY23 highlights: (1) INFO reported healthy USD revenue growth of +4% QoQ CC and +18.8% YoY CC at USD 4,555mn (in line with our estimate). (2) Growth was led by digital revenue growing at +3.8% QoQ while core services remained flat sequentially (+0.4% QoQ). Management is witnessing acceleration in core services, led by increased demand for cost efficiency programs and automation. (3) EBITM improved 149bps QoQ to 21.5%, supported by +70bps from FX, +130bps on contract profitability and efficiencies (lower sub-con) and -40bps from senior workforce wage increase. (4) LTM voluntary attrition moderated to 27.1% in Q2, from 28.4% in last quarter. (5) INFO announced buyback of up to INR 93bn via the open market route for a maximum buyback price of INR 1,850.

Outlook: We have factored in USD revenue growth of +13/10.9/9.1% and EBITM is factored in at 21/21.5/21.5% for FY23/24/25E.

Shares of Infosys Limited was last trading in BSE at Rs. 1474.05 as compared to the previous close of Rs. 1419.75. The total number of shares traded during the day was 519749 in over 17418 trades.

The stock hit an intraday high of Rs. 1494.00 and intraday low of 1468.00. The net turnover during the day was Rs. 769009895.00.

Source : Equity Bulls

Keywords

Infosys INE009A01021 INFY HDFCSecurities MaintainBuy Q2FY23 H1FY23 ResultUpdate