Infosys’ Q2 FY17 revenue/margin performance was well ahead of expectations. However, FY17e revenue guidance cut was a dampener indicating almost no growth in H2 and lower exit into FY18e. Cancellation of the RBS contract and seasonality have driven the guidance cut and we believe that trying to imply management conservatism would be taking a leap of faith. Reasonable valuations, growth pickup beyond H217 and strong positioning justify our Buy rating.
Revenue and margins beat consensus expectations
Infosys’ revenue growth of +8.2% y-o-y, +3.4% q-o-q (+3.9% in cc) was well ahead of consensus expectations of 2-2.5% q-o-q, revenue growth being driven by volume growth of 4% q-o-q. While Europe growth picked up (+3.7% q-o-q), the major driver of growth was India (+29%) and RoW (+5%). Margins too were impressive expanding 80bps q-o-q due to a combination of utilisation, offshore shifts and reduction in subcontracting costs.
Guidance cut a dampener, FY17e revenue growth now at 7.5-8.5% y-o-y
Infosys lowered its FY17e revenue growth guidance by 250-300bps, the second time in two quarters driven by the base of GST contract already in Q2, the ramp down of RBS contract in Q3 and general weak seasonality in H2. This should also result in FY17e margins in the lower half of the 24-26% range indicated by the management.
What’s the silver lining here?
We believe that arguing the extent of management conservatism in the guidance would be taking a leap of faith given the volatility we have seen across the sector recently. At the same time, total contract value (TCV) of $1.2 billion, the highest in Infosys’ history and improvement in large client buckets indicate the continuing momentum for the company. 60% of the TCV being from BFSI should also address concerns around the vertical and its impact on Infosys.
We revise our estimates to incorporate the results and guidance. Due to a slower H2FY17e and consequently a lower exit rate, we cut our FY17e/18e dollar revenue forecasts by 2.8%/4.2%. Our margin forecasts too are reduced leading to a 2.6%/4.5% reduction of FY17e/18e EPS forecasts. We revise down our 12 month price target to R1,280 still based on 18x PE applied to FY18e EPS (unchanged from earlier). Maintain Buy. Reasonable valuations, low expectations, an improving revenue trajectory post H217 and Infosys’ strong positioning within digital drives our positive view.
Weakening macro, higher competitive intensity, unfavourable cross currency, stronger INR.
Valuation and revision to estimates
Due to a slower H2FY17e and consequently a lower exit rate, we cut our FY17e/18e dollar revenue forecasts by 2.8%/4.2%. Our margin forecasts too are reduced leading to a 2.6%/4.5% reduction of FY17e/18e EPS forecasts. We revise down our 12M price target to R1,280 still based on 18x P/E applied to FY18e EPS.
Founded in 1981 and headquartered in Bangalore (India), Infosys is a leading provider of offshore-centric consulting and IT services. Utilising a global delivery model, Infosys offers IT solutions both from client locations and its own offshore facilities, primarily in India. Infosys’ worldwide head count currently stands at approximately 160,000 employees.