Strong guidance for FY17e (estimates) revenue at 11.8-13.8% y-o-y implies sustained industry leading growth which should support premium valuations. Q4FY16 growth was slightly below estimates although margin beat was a positive surprise given recent concerns on Infosys’ aggressive pricing approach. Client metrics and attrition continued to show steady improvement with robust deal pipeline and positive commentary on outlook. We increase our revenue forecast/PT; maintain Buy.
Q4FY16 rounds off a good year: Quarterly revenue at +1.6% q-o-q (+1.9% in cc, +13.3% y-o-y) was slightly below estimates but still rounded off a good FY16 for Infosys (+13.3% y-o-y in cc terms). Margin performance (25.5% Ebit, +60bps q-o-q) was the positive surprise especially given the recent criticism on Infosys’ price aggression in the market. Despite this, realisation decline (-1% q-o-q) for the second consecutive quarter should keep the debate alive even though other levers (utilisation, onsite offshore, subcontracting, SG&A and growth itself) still remain.
Strong FY17e guidance implies momentum to continue: Company guided to revenue growth of 11.8-13.8% y-o-y in USD terms in FY17e, better than estimates and implies an impressive 3.3-4.1% CQGR over the next 4 quarters. This should sustain revenue momentum and industry leading growth in FY17e which should support the growth premium and valuations for the stock over a longer term.
Deal wins robust, client and employee metrics healthy: Infosys signed 6 large deals with a total contract value (TCV) of $757m; the TCV of deal wins in FY16 is an impressive +45% y-o-y. Infosys’ thought leadership on technology transitions, automation and digital adoption is now firmly translating into deal wins. Client metrics too have improved, the company adding one client to the $100m+ bucket and three to $75m+ bucket. Reported attrition too showed a solid improvement to 17.3%.
Valuation/Risks
We revise our estimates to incorporate the results and guidance, and introduce FY19e forecasts. Our FY17e/18e USD revenue forecast gets upgraded by 1.1%/2%. However, EPS shows only a marginal change due to increase in tax rates as guided by the company. We increase our 12M PT to R1,390, still based on 18x P/E (unchanged), now applied to FY18e EPS (vs average of FY17e and 18e EPS earlier i.e. rolling forward EPS). Maintain Buy.
Risks: Weakening macro, higher competitive intensity, unfavourable cross currency, stronger INR.