Numbers were sound across verticals; mgmt has raised guidance; TP up to Rs 2,124 given the revenue growth, execution; ‘Buy’ retained
Infosys again delivered strong results with revenue growth of 5.3% q-o-q (in cc) in Q3FY21 compared with our and Street’s estimates of 5% q-o-q and 3% q-o-q, respectively. Margins came in flat at 25.4%, but ahead of Street’s estimate of 25.1%. The company notched up highest-ever deal-wins, aggregating $7.1 bn, with 73% being net new clients. The net new deals for 9MFY21 stand at over $8 bn. Moreover, the net new deals signed in Q3 are more than 1.5 times of the entire FY20.
Management remains confident of the strength in business momentum and strong market share gains. In light of Infosys’s robust revenue growth and consistent execution, we are raising the TP from `1,850 to `2,124 while rolling forward the valuation to Q1FY23e.
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Verve across verticals
Financial services/Retail/Communication/Energy and utility/Manufacturing/Hi-Tech/Life sciences grew 12%/2%/0.8%/ 4.9%/-4.1%/17.4%/ 11% on a y-o-y basis (in cc). Similarly, by geography, North America/Europe/Rest of World/India posted y-o-y growth of 8.8%/1.3%/6.1%/4.3% (in cc). Free cash flow increased to $772 mn from $674 mn in the previous quarter. Voluntary attrition was 10% compared with 7.8% in Q2FY21, much lower than the acceptable 14–15%. The company added 139 new clients. It won 22 large deals, mostly in America and Europe.
Sector tailwinds continue to aid growth
The company again raised its revenue guidance, to 4.5–5% (in cc); management also edged up the margin guidance to 24–24.5%. Utilisation stood at 86.3%, an all-time high. Onshore mix came in at 25.2%, the lowest ever. More than 9,100 employees joined the company in Q3. Infosys will roll out wage hikes across levels effective 1st January, 2021. Margins remained stable with a positive contribution from better utilisation and better onshore mix offset by transition costs, promotion and compensation-related costs and others. That said, wage hikes are likely to keep margins under pressure in Q4FY21e. Cash at the end of the quarter was $4.5 bn.
Outlook: Consistency continues
The company impressed with strong results this quarter as well. We maintain that Infosys, given its significant contribution from cloud and digital, remains a major beneficiary of this tech upcycle. Maintain ‘BUY/SO’ while increasing the TP from Rs 1,850 to Rs 2,124 (36x Q1 FY23e) as we roll forward to Q1FY23e.