Infosys also declared an interim dividend of `8/share with management indicating that dividend could be preferred over buy-backs going forward post introduction of taxes on the latter.
Infosys’ Q2 was largely in line with expectations as slight miss in growth (3.3% q-o-q cc vs. estimates of 3.7%) was offset by better margin (21.7% vs. estimates of 21.5%). It kept upper end unchanged at 10%, which we believe is conservative and factor in 11% for FY20e. Margin guidance was unchanged but now seems more credible. Strong headline deal TCV of $2.8 bn was due to high renewals. Performance & commentary indicated incremental headwinds in retail, similar to TCS.
In line quarter
Infosys’ Q2 performance was overall largely in line with expectations, as slight miss in revenue growth (3.3% q-o-q cc vs. estimate of 3.7%) was offset by marginal beat in Ebit margin (21.7% vs. est. of 21.5%). On y-o-y basis, revenue grew at 11.4% cc which implies double-digit growth even adjusting for inorganic contributions (140bps) from Stater & Fluido. q-o-q margin improvement of 120bps was driven by 110bps contribution from improved operational efficiencies, another 110bps from absence of higher visa costs in Q1, partly offset by wage hikes (70bps) and one-offs (30bps). Infosys also declared an interim dividend of `8/share with management indicating that dividend could be preferred over buy-backs going forward post introduction of taxes on the latter.
High TCV helped by significant renewals
Infosys upped the lower end of its FY20e revenue growth guidance to 9% vs. 8.5% earlier but kept the upper end unchanged at 10% – we believe management is being conservative (it has grown 11.9% y-o-y in 1H) and factor in 11% y-o-y cc growth for the full year. Headline large deal TCV was highest ever at $2.8 bn but management clarified this includes 90% rebids, implying a more normalised new deal contribution of $285 mn. Improvement in attrition both q-o-q (-170bps) and y-o-y (-50bps) was a key positive. Ebit margin guidance for FY20e was kept unchanged at 21-23%, along expected lines but now appears more credible.
Takeaways from earnings call
(i) Infosys performance and commentary in retail (+1% y-o-y cc) echoed TCS’ feedback of delayed decision making & increased volatility in the vertical;
(ii) Infosys also reiterated issues in parts of BFSI, particularly US capital markets & European banks even as corporate banks (payments, lending) and insurance continue to do well; (iii) management highlighted strong momentum in communications and Energy & Utilities vertical; (iv) slowdown in RoW was attributed to volatility; (v) Digital continued to grow well, up 38.4% y-o-y cc; and (vi) management clarified that it will continue with the old tax regime for now.
Tweaking estimates; maintain Buy
We tweak our estimates slightly to factor in slightly weaker growth & margin – as a result our price target declines to `915 (prev. `930). We maintain our Buy rating despite some incremental risks, as we believe Infosys remains one of the best placed amongst top-tier IT services cos to benefit from the tailwind of large-scale digital transformation and resultant new deal momentum.