Infosys reported strong c/c revenue growth and raised FY2023E revenue growth guidance (14-16% growth from 13-15% earlier). Two aspects require focus—(1) EBIT margin decline was not a surprise; however, the decline in manufacturing vertical margins was, and (2) weak TCV points towards a slowdown but is already part of our estimates. We cut FY2023-25E EPS by 2-4% and Fair Value to Rs 1,690, valuing the stock at ~25X FY2024E EPS. Maintain Buy—we believe Infosys will continue to lead on growth and with margin improvement from now on.
Strong revenue growth; weak margin
5.5% sequential and 21.4% y-o-y revenue growth in c/c speaks volumes about the capabilities and wallet share gains by Infosys. In reported terms, revenues grew 3.8% q-o-q to $4,444 mn. Growth was broad-based across verticals with manufacturing (6.5% q-o-q in USD terms) leading the charge. EBIT margin was disappointing with a 160 bps q-o-q decline to 20%, 80 bps lower than our estimate. Low margin/loss in Daimler deal continues to surprise. Headwinds from wage hike (160 bps), higher subcontractor costs (30 bps), cost to backfill attrition and lower utilisation rates (40 bps margin impact) due to large fresher induction impacted margins. Net profit of Rs 53.6 bn grew 3.2% y-o-y and declined 5.7% q-o-q.
EBIT margin to be at the lower end of 21-23% band
Infosys, like the rest of the players, has been hit by a perfect storm: Talent shortage, high attrition, fresher induction, high subcon charges and wage revisions to boot. Many of these headwinds will become tailwinds once the talent situation eases (may take a quarter or two). The most interesting margin lever is from the Daimler deal in the manufacturing vertical. Daimler deal margins will improve in the subsequent quarters. We model EBIT margin of 21%, 22.1% and 22.5% for FY2023E, FY2024E and FY2025E.
Cut FY23-25E EPS by 2-4%
We raise FY2023-25E revenue growth assumption by 0-1%. We cut FY2023-25E margin assumption by 40-100 bps and EPS by 2-4%. We continue to stay positive on the stock. We acknowledge likely near term weakness in stock price. Nonetheless, Infosys is well positioned to be a growth leader in the multi-year technology transformation cycle with cloud as foundation. Strong digital capabilities, strength in large/mega deals, favourable mix with lower legacy drag and robust execution momentum keep us confident.