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Infosys - Near-term margins will likely come under pressure - ICICI Securities

Posted On: 2021-01-14 06:22:53 (Time Zone: Arizona, USA)


While peers are still on a recovery mode, Infosys continued its growth streak in Dec-20 (+6.6% YoY, CC, vs +0.4% for TCS and -2% for Wipro) aided by Vanguard deal. However, while peers delivered sequential margin expansion leveraging on offshore shift, the deal ramp-up costs limited such scope for Infosys. Momentum in large deal signings (~US$7bn, includes captive takeovers) continued to be robust. Accordingly, despite a taller revenue base in FY21E, Infosys still anticipates double-digit revenue growth in FY22. (1) Ramp-up of multiple large deals (possibly with some pass-through), (2) FY21E exit margins, and (3) planned utilisation reduction hint at ~230bps YoY EBIT margin contraction (to 22%) in FY22E (I-Sec est). As we rebase our exchange rate assumptions and adjust our estimates to factor-in the large deal impact, our EPS over FY22-FY23E witnesses 5%-9% downgrade. Despite the near-term margin headwinds, we continue to remain positive as Infosys is one of the few names currently operating at stronger business momentum (than pre-Covid). Accordingly, the sharp multiple rerating does not concern us as much as it does in case of other stocks (e.g. Wipro).

- Largely in-line revenues and margins. Revenue growth of 5.3% (QoQ, CC) was ~200bps ahead of our expectations. It is key to note this comes despite the relatively taller revenue base of the company over H1FY21. This strength in revenues was led by residual ramp-up of Vanguard deal. Most segments are running at revenue run rates significantly higher than pre-Covid levels (e.g. FS, Hi-Tech, Life Sciences, North America etc.). Even segments that are not yet at a higher run-rate (e.g. manufacturing) have reported strong QoQ improvement in Dec-20.

Sequentially, EBIT margins remained largely stable. Better operating parameters, e.g. utilisation and onsite-offshore mix, provided 100bps tailwind to margins. However, this was largely negated by transition / rebadging costs (-50bps impact) for the recently won deals, costs due to employee promotions / compensation corrections (-20bps impact) and higher subcon / miscellaneous expenses (-50 bps impact).

- Strong deal win momentum; Upgrade in FY21 revenue / margin guidance. Momentum in large deal signings (~US$7bn, includes captive takeovers) continued to be robust. 73% of this is indicated to be net new. Revised FY21 revenue growth guidance (4.5%-5% YoY, CC) is better than our expectation of 3%-4%. Revised EBIT margin guidance for FY21 is in line with our expectations (24%-24.5%). As large deals ramp up from Q2FY22 onwards, management is confident of achieving double-digit revenue growth in FY22 despite a relative taller base in FY21.

- Near-term margins may come under pressure; nevertheless, maintain BUY. As we rebase our exchange rate assumptions and adjust our estimates to factor-in large deal impact, our EPS over FY22E-FY23E witnesses 5%-9% downgrade. Despite the near-term margin headwinds, we continue to remain positive as Infosys is one of the few companies currently operating at a stronger business momentum (vs pre-Covid). Accordingly, the sharp multiple rerating does not concern us as much as it does in the case of other stocks (e.g. Wipro).

Shares of INFOSYS LTD. was last trading in BSE at Rs.1370.6 as compared to the previous close of Rs. 1387.7. The total number of shares traded during the day was 2734302 in over 62933 trades.

The stock hit an intraday high of Rs. 1384.5 and intraday low of 1318.05. The net turnover during the day was Rs. 3730981293.


Source: Equity Bulls

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