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Infosys Rating: buy: A strong third quarter for the company

FY22 revenue guidance up to 19.5-20%; FY22-24e EPS up 1.5-3.2%; TP raised to Rs 2,440; ‘Buy’ rating retained; top sector pick

Employees chat outside the Infosys Experience Center at the Infosys Ltd. campus in the Electronics City information technology hub in Bengaluru, India, on Thursday, Jan. 10. 2019. Asia’s largest software outsourcing provider that is wrestling with clients' changing technology needs and a shift toward automation reports quarterly profits on Nov. 11. Photographer: Karen Dias/Bloomberg

Q3FY22 revenue performance came in significantly ahead of the Bloomberg consensus estimate (+3.7% q-q) in constant currency (cc) terms, with revenues of $4,250 mn (+7% q-q, +21.5% y-y in cc). While growth was broad-based across industries, manufacturing (+48.4% y-y in cc led by the Daimler project), life sciences (+29.2% y-y in cc) and communications (+22.2% y-y in cc) grew the fastest.

Digital now forms 58% of revenues. Owing to the company’s strong Q3FY22 performance, Infosys raised its revenue guidance to 19.5-20% y-y in cc for FY22 from 16.5-17.5% y-y.Deal wins remain strong, setting stage for robust growthDeal wins in Q3FY22 stood at $2.5 bn (+17% q-q) with a net new component of 44%. As flagged in our recent detailed sector report, Infosys has strong capabilities (in products and platforms) and scores well in our EPIC rating framework.

We believe strong participation by Infosys in ongoing digital transformation spending led by cloud adoption should help it continue to increase its market share. We estimate USD revenue growth of 15-21% y-y in FY22-24F. We also expect Infosys to post the strongest growth in the large-cap Indian IT services space over FY22-24F.Margin defence strong despite supply side challengesEbit margin of 23.5% (-10bp q-q, -190bp y-y) was better than the consensus estimate of 23.4%.

Headwinds on Ebit margins of 80bp from employee interventions (hikes and promotion costs), and 40bp from lower employee utilisation were offset by tailwinds of 20bp from USD-INR currency movement, 40bp from lower SG&A spending and 50bp from cost optimisation. Infosys significantly increased its FY22F fresher intake guidance to 55,000 in Q3FY22 from 45,000 in Q2FY22.

Attrition levels (on a LTM basis) rose to 25.5% (+440bp q-q) but has started stabilising, according to mgmt. We believe ongoing pyramid optimisation (due to fresher intake) and selective price hikes should help Infosys improve its Ebit margin to 24.3-24.6% in FY23-24F from 23.6% in FY22F.

Earnings forecast revisions, valuation  and risksWe increase our FY22-24F EPS by 1.5-3.2%. We reiterate Buy rating and lift our TP to `2,440 (32x FY24F EPS). Our target multiple is based on a three-stage growth model discussed in our recent sector report . Key risks to our call include slower-than-expected deal wins and margin headwinds from high attrition.

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