The stock trades at a valuation of 17.4x FY20e EPS, and we retain it as our top pick. Maintain ‘BUY/SO’ with a revised target price of Rs 923 (Rs 880 earlier, 20x Q3FY21e EPS) as we roll over to Q3FY21e.
Infosys posted robust 12.4% y-o-y constant currency (cc) growth versus annual guidance of 7.5–9% (2.3%/ 2.8% q-o-q in USD/cc terms), thereby forcing a guidance upgrade in Q1 itself (to 8.5–10%), which is rare. Large deal-wins worth $2.7 bn is the highest ever and instills immense confidence in the industry-wide growth story. Ebitda margin at 23.6%, down 30bps y-o-y, outclassed Street’s 22.9% estimate.
While margins are negatively impacted by wage hikes and visa costs, they are offset by the improvement in realisations. Besides, margin pressure would largely ease off with the proportion of digital rising and deployment of trained resources leading to decline in sub-contracting costs, thereby paving the way for stronger-than-expected earnings growth in our view. The stock trades at a valuation of 17.4x FY20e EPS, and we retain it as our top pick. Maintain ‘BUY/SO’ with a revised target price of Rs 923 (Rs 880 earlier, 20x Q3FY21e EPS) as we roll over to Q3FY21e.
Robust digital-led growth forces guidance upgrade
Infosys reported strong revenue growth led by communications and energy & utilities, which grew by 22.6% and 17.7% (y-o-y, cc) respectively. Financial services and retail, which were soft last quarter, delivered robust growth of 11.3% and 6.9%, respectively. Our belief in the strength of the underlying demand is vindicated by the upward revision in FY20 revenue guidance to 8.5–10% y-o-y (7.5–9.5% outlined in Q4FY19). Given blistering digital growth (41.9% y-o-y), Infosys is in pole position to achieve the upper end of its stronger guidance for FY20 in our view.
Margin pain behind, augurs earnings growth
Operating margin dipped 100bps q-o-q largely driven by wage hikes (up 60bps), visa costs (up 80bps) and acquisition costs (up 30bps). These were partially offset by improved realisation (70bps). We reiterate that pressure points such as subcontracting costs and visa costs cannot inflict greater pain, and hence expect margins to recoup ahead. This coupled with a strong revenue outlook should enable Infosys to turn in much stronger-than-expected earnings growth.
Outlook: Earnings growth ahoy!
We maintain Infosys as our top pick based on its: (i) unrelenting deal-win momentum—$2.7 bn in Q1FY20; (ii) digital-focused strategy; and (iii) undemanding valuation. We remain bullish on the IT sector in general, and root for Infosys as it leads the way. Maintain ‘BUY/SO’ with a revised TP of Rs 923.