Infosys’ guidance disappointed on lower than expected growth and downward reset of the margin band. Minor misses added up given the ‘distractions’ that company cited. While guidance adds the ‘learnings’ from previous quarters, debate will remain on extent of conservatism, if at all given recent slips and low exit rate. We revise our estimates for guidance and stronger Rupee. FY18 remains the test even as expectations are low and valuations inexpensive, maintain Buy.
Infosys guided to revenue growth of 6.5-8.5% y-o-y in cc terms for FY18E vs expectations of 7-9%. This translates to a dollar revenue growth of 6.1-8.1% y-o-y and a CQGR of 2.1-2.9%, quite achievable in our view. While the basis for guidance remains unchanged, management indicated that learnings from the recent quarters has been incorporated (resets of guidance through FY17). The bigger disappointment was the downward reset of Ebit margin band to 23-25% vs 24-26% earlier due to Rupee appreciation and increasing local presence in US.
The company announced a return of $2 billion of cash (from existing cash pile of $6 billion) to shareholders. This is c6.5% of the current market cap and should provide stock support. The company also tweaked its payout policy to 70% of FCF now vs 50% of NP earlier. Given the FCF/NP conversion of 70% over the past 5 years, we believe that this is just a change of definition.
The recent tiffs between the founders and board has prompted appointment of a co-chairman from one of the independent directors. Also, the company has seen a deceleration in deal wins in H217 (FY17 total deal signings -10% y-o-y). While growth context for FY18E has been set with the guidance, this will need to be monitored given the ‘distractions’ that the management has cited in the press release.
We revise our estimate to incorporate the guidance and stronger rupee, and introduce FY20E estimates. Our new 12M PT of `1,100 is now based on 15x multiple (vs 16x earlier and a discount to the 5-yr average of 16x) applied to FY19E EPS, maintain Buy. Growth is likely to be stable although a significant recovery in trajectory in growth is not implied in the guidance.
Despite risks to earning due to the recent rupee appreciation, valuations remain inexpensive and expectations low. Risks: Weakening macro, higher competitive intensity, unfavourable cross currency, stronger rupee.