1. Infosys stock rating: Jefferies says ‘Buy’ as quarterly results were good

Infosys stock rating: Jefferies says ‘Buy’ as quarterly results were good

Expectations remain low, growth is likely to remain stable in FY18e and management’s execution has continued to be robust. Payout in FY18e will be healthy with a c3.3% dividend yield and $2 bn capital return programme

By: | Published: July 24, 2017 3:38 AM
Revenue was in line while margins surprised; attrition and new deal signings need monitoring; company best placed among peers

Revenue was in-line, with margin performance robust, backed by realisation gains and impressive execution on utilisation. North America and banking/financial growth was tepid but should pick up in 2HFY18, per management commentary. The $2 bn capital return programme is awaiting approvals even as company retained its FY18e revenue growth guidance. Attrition which showed a sharp increase q-o-q and new deal signings which have been soft will need monitoring. Maintain Buy.Revenue in-line, margins beat both helped by realisation increase Infosys reported revenue growth of 6% y-o-y, in line with estimates. This was driven equally by volume and realisation. Margin decline of 50 bps q-o-q was better than expectations, with benefits of utilisation and realisation offsetting impact of ` strength and wage hikes. The company has started disclosing revenue from new products and services, at 10% of revenue, with revenue from digital based on definition used by peers at 23%.

Guidance maintained, few chinks in operating metrics
The company maintained its FY18e revenue guidance of 6.5-8.5% y-o-y, with $ guidance raised to 7.1-9.1% y-o-y. Margin guidance was maintained at 23-25% at Ebit level. We believe that reaching the higher end guidance will hinge on stronger 2H growth, something that doesn’t inspire much confidence given the last three-year history and lack of consistent data points on industry demand. We are projecting 7.6% y-o-y in $ revenues for FY18e. Two metrics that would need monitoring are — (i) Attrition which showed a 340 bps q-o-q increase; (ii) New deal signings at $700, well below management’s earlier stated target of >$4 bn per annum.

Best placed amidst industry headwinds
Expectations remain low, growth is likely to remain stable in FY18e and while there have been some hiccups, management’s execution has continued to be robust. Payout in FY18e will be healthy with a c3.3% dividend yield (based on regular payout) and $2 bn capital return programme (in approval process, details to be announced, >6% of current M-Cap). We think Infosys remains the best placed among Indian peers in the transition towards digital with recent operational discipline driving further confidence.

Valuation/Risks
We tweak our estimates slightly to incorporate the results and the commentary, maintain our Buy rating. Our 12M price target is unchanged at Rs 1,100, still based on 15x multiple applied to FY19e EPS. Risks: Weak macro, higher competition, stronger rupee.

Results summary – In line on revenue, margins surprise positively
Infosys’ Q1FY18 revenue growth of 6.0% y-o-y and 3.2% q-o-q was in line with estimates. This was driven by volume growth of 1.7% q-o-q with rest coming from an increase in productivity. Margins declined 50 bps q-o-q, better than our expectations: -80 bps due to rupee appreciation, +20 bps benefit from cross currency, +90 bps on the back of utilisation, +50 bps from realisation and -140 bps on the back of increasing wages/subcontracting/visa costs. Volume increased by 1.7% q-o-q while price realisation +1.8% q/q.

Details of the buyback, nothing incremental yet
The company had announced in April-17 that it would return up to $2 bn of its total cash to shareholders in FY18 through a dividend or buyback. Note that the company has $6 bn of net cash on its balance sheet as of Jun-17. The management indicated that work is in progress on the approvals in this front.

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