We cut FY21-22E revenue by 5-7% and EPS by 10-11% as we build impact of Covid-19 pandemic globally. We forecast revenue decline of 0.9% in FY21E and expect Ebit margin to decline to 20.6%.We expect normalization of growth in FY22E. Post 32% correction in stock price, Infosys trades at trough multiple. Upgrade to ‘buy’ from ‘add’ on – attractive valuations; we value Infosys at normalized multiple of 16X FY22E earnings resulting in fair value of Rs 680 (Rs 810 earlier) and wallet share gains and excellence in execution will ensure that it remains in top percentile on growth.
We cut our estimates recently due to the spread of Covid-19 in Asia and early signs in Europe and US. Covid-19 spread has increased exponentially leading to lockdowns and standstill of economic activity in many countries. As a result we make the following changes.
Revenue growth for industry leaders (TCS and Infosys) comprises of two components – global IT spending growth – we expect this to contract sharply in CY2020 and market share gains defined as growth above global IT spending. Infosys has grown 4-6% points higher than global IT spending. Infosys’ broad service suite, client relationships, delivery excellence and improved digital capabilities will ensure continuation of trend in FY21E.
Lockdowns, potential cut in discretionary spending, impact on mobility of employees and collapse of travel will impact demand. We expect flattish revenues y-o-y for June 2020 quarter, a sharp deceleration of 9.5% c/c revenue growth reported by Infosys in December 2019 quarter.
We cut FY21E Ebit margin to 20.6% (22% earlier) despite revision in rupee/dollar rate to 73.8 from 72.5. Pricing pressure, disruption in resource mobility and lower utilisation will account for bulk of the pressure. Automation, offshore shift of workloads, lower variable compensation and travel expenses can partly absorb the pressure.
Infosys stock now trades at 14X FY21E and 12.6X FY22E earnings, attractive in our view. Infosys is now trading at close to trough multiple on trough earnings with a dividend yield of 5%. We value the company on normalised multiple of 16X FY22E earnings leading to fair value of Rs 680. This multiple is based on growth of 7% for seven years followed by 4% growth to perpetuity discounting the earnings using COE of 11%. Infosys in our view will be in the top quartile of growth rates and continue to gain market share for the next few years. Key risk – extended lockdowns and elongated recession.