Infosys: To overcome COVID-19 challenges; retain ‘Buy’

In light of the heightened uncertainty in the near term, we were not taken aback by the cautious outlook. Beyond near-term challenges, Infosys should be a key beneficiary of digital IT spends by enterprises.

Written by Motilal Oswal

April 22, 2020 03:15 IST

Despite encouraging medium-term prospects, Infosys has hinted at a challenging near term with no clear view on recovery.

Despite the COVID-19 impact on utilisation, Infosys was able to defend its gross margins (q-o-q, 33.4%), which is comforting. Large deal signings in March 2020 (~$1.7 billion v/s $1.8 billion in December 2019) were impacted. But it is important to note that the run rate of new deal wins showed a meaningful increase (~50% q-o-q). We expect supply-side aspects to ease off even as work from home (WFH) may outlast lockdowns for a significant share of the workforce. In light of the heightened uncertainty in the near term, we were not taken aback by the cautious outlook. Beyond near-term challenges, Infosys should be a key beneficiary of digital IT spends by enterprises. We have marginally cut our FY21/FY22E EPS estimates as we build in heavier pricing pressure, the impact of which is partially offset by the change in our exchange rate assumption. Reiterate ‘buy’.

In Q4FY20, revenue ($)/Ebit (`)/PAT increased 4%/7%/6% y-o-y (v/s our estimates of 5%/8%/3% y-o-y). As client approvals for WFH were not received in certain cases, revenue witnessed ~$32 million (~1% revenue) drop. Infosys witnessed broadbased decline across geographies with its Indian business witnessing the most pronounced impact (-8.5% q-o-q, $). Adjusted for a couple of one-offs, Ebit margins were largely in line with expectations. Decline in utilisation (-90 bp impact), H-1B visa costs (-40 bp impact) and receivables hit (-50 bp impact) were the margin headwinds. ` depreciation (+50 bp impact), reduced travel and other cost optimisation measures (+50 bp impact) were the key margin tailwinds. Large deal bookings in Q4FY20 stood at ~$1.7 billion (~56% – new deals).

In line with our expectations, the company suspended its tradition of guiding for revenue growth/profitability because of the heightened uncertainty. Despite encouraging medium-term prospects, Infosys has hinted at a challenging near term with no clear view on recovery. Given the company’s track record of adapting to multiple challenges and technology change cycles, we believe it’ll be able to navigate through the COVID-19 headwinds. The stock is currently trading in line with its long-term cross cycle average. Our TP implies 18x FY22E EPS. Retain ‘buy’.

This article was first uploaded on April twenty-two, twenty twenty, at fifteen minutes past three in the night.