Infosys delivered steady Q3FY17 performance. We detail our thoughts on three metrics that have raised concerns— decline in revenue from top-10 accounts—appears far worse than underlying trend, realisation dip; we attribute it to seasonal factors, and margin defence through lower variable comp; not sustainable.
We roll over to FY2019E and revise TP to R1,140 (15X FY2019E EPS) from R1,175 as we build in visa concerns through cuts in multiples from 16.5X. We like the strategy and execution and find valuations attractive.
EBIT margin of 25.1% was 100 bps above our estimate led by lower employee costs due to lower variable compensation payout and higher leave utilisation/ lapses.
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Net profit of R37.1 billion was 7.4% ahead of our estimate due to EBIT outperformance and higher-than-expected other income. The stock has corrected due to perceived poor quality of performance.
In absolute terms revenues from top 10 clients declined by $51 million sequentially. This can be broken down into — revenue decline of $ 11 million from top client in which we do not expect any immediate bounce back, $30 million impact of RBS ramp-down, ~$5 million cross-currency impact and $5 million impact from accounts in top 10 due to furloughs, especially in hi-tech accounts.
Even as we believe that pricing will be under pressure, the company is investing to improve productivity and ensure that realisation and margins do not decline.