Growth trajectory stayed on the mend for Infosys (INFO) with a 10.1% Y-o-Y constant currency (CC) revenue growth in 3QFY19, highest in the last 10 quarters, and healthy deal wins ($1.6 billion).
The upward revision in FY19 CC revenue growth guidance – translates to 0.1%-1.9% (JMFe) QoQ growth in 4QFY19 should give a good exit momentum. We have marginally raised our FY19-21 dollar revenue CAGR forecasts to 9.8%. However, margin outlook deforms the picture. Despite half of the 120bps margin miss in 3QFY19 coming from one-offs, INFO expects margin to stay muted in 4QFY19.
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This could weigh on FY20/FY21 margins given the potential headwinds (currency volatility and deal transition costs). Thus, our FY20/ FY21 EPS estimates are lower by 4.7%/2.4%, also on rupee reset and bakes-in the $1.2bn buyback. On balance, while the margin risks + macro concerns could limit the stock’s absolute return, we expect the improving execution (successive quarter of CC revenue growth ahead of TCS) 6.6% dividend buyback yield could help narrow the PER gap (18%) vs TCS. Our price target is unchanged at Rs 810.
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Consolidated revenue grew 2.3% QoQ to $3 bn; CC growth (2.7%) was significantly ahead of our/consensus estimates. Volume growth was healthy (2.6%) and blended CC pricing was stable. EBIT margin was down 118bps Q-o-Q to 22.6% (vs our/Street estimates of 23.8%/23.5%) as currency gains (+50bps) and operational efficiencies (+40bps) were offset by one-time charges (-60bps), lower utilisation/higher onsite (-80bps) and planned wage hikes (- 30bps) and investments (-30bps). EBIT, adjusted for the one-time depreciation charge, was c2% below our estimates. PAT at Rs 3,610 crore was also below estimates due to writedown in the value of Panaya and Skava.
The revised CC revenue growth guidance translates to 7.2- 7.7% reported FY19 USD revenue growth range (JMFe) and implies revenue momentum should stay strong in 4QFY19, helped by ramp-up in the $700-m Verizon deal.
