Q4 results in line with expectations; estimates revised to factor in 7.5-9% CC growth over FY19-21; risk-reward favourable; TP up to Rs 1,340 from 1,100
A cut in margin guidance to 22-24% was the key disappointment in Infosys’ Q4 results even as Q4 performance and FY19e revenue growth guidance of 6-8% were in line with expectations. The company plans to return another $2 bn to investors in FY19, a positive. We expect the new CEO to focus more on services vs. products and on execution. Overall, with growth likely to accelerate over FY19-21 and valuation reasonable, risk-reward remains favourable in our view.
In line performance, growth guidance; cut in margin guidance: Infosys’ Q4 revenue growth of +1.8% q-o-q in dollar (+0.6% in constant currency) was largely in line with expectations while Ebit margin of 24.7% was slightly ahead. FY19e revenue growth guidance of 6-8% in constant currency was also along expected lines and implies an acceleration from 5.8% in FY18. Cut in Ebit margin guidance to 22-24% vs. 24.3% in FY18 and 23-25% range earlier is a disappointment, especially given there was downside room in previous guidance range.
Another $2 bn to be returned in FY19: Infosys intends to return another $2 bn to shareholders in FY19 of which $400 mn will be returned in June as a special dividend of Rs 10/share and remaining $1.6 bn will be returned in a form that is yet to be decided. This is over and above regular dividend pay-out of 70% of FCF.
New CEO highlights four-pronged strategy; Panaya/Skava to be sold: New CEO Salil Parekh highlighted a four-pronged strategy: (i) scaling digital services; (ii) improving productivity in core business through automation and AI; (iii) re-skilling of employees; and (iv) greater localisation. While most are a continuation of previous strategy, we expect greater focus on services vs. products and on execution. Infosys intends to sell Panaya and Skava, two key acquisitions made during Sikka’s tenure. However, it also announced a new acquisition of $ 75 mn suggesting that the decision is asset-specific, while strategy of selective M&A remains.
Risk-reward favourable — maintain Buy: We revise our estimates to build in 7.5-9% constant currency growth over FY19-21 and 23.5-23.8% Ebit margin. The stock is currently trading at 16.5/15x FY19/20e P/E and at a 20% discount to TCS even as underperformance relative to it has narrowed, making risk-reward favourable in our view.
Valuation/risks: We value Infosys at 17x FY20e P/E, at a slight premium to 5-year median to arrive at fair value of Rs 1,340 (prev. Rs 1,100). Key risks:
(i) weaker revenue growth; (ii) lower margin; (iii) unfavourable currency.