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Infosys - 2QFY22 Result Update - Superior Execution Deserves Multiple Rerating; Raise TP to Rs2,120 - Reliance Research

Posted On: 2021-10-14 22:22:36 (Time Zone: IST)

Strong Print; One More Revenue Guidance Upgrade

2QFY22 revenue is at US$3.99bn, which is 110bps above our estimate of US$3.95bn. The sequential constant currency growth is at 6.3% vs. our estimate of 5% (consensus: 6%), driven by a broad-based growth across industries. EBIT margin stood at 23.6%, substantially ahead of our estimate of 22.2%, driven by a better-than-expected operating leverage and lower-than-expected wage inflation. Net profit stood at Rs54.2bn, which is 3.4% above our estimate of Rs52.1bn, driven by an outperformance in both revenue growth and EBIT margin. Large deal signings remained healthy at US$2.15bn. Management's commentary on the demand environment and deal pipeline remained strong. Infosys (INFO) upgraded its FY22 revenue growth guidance at 16.5-17.5% in CC terms vs. the prior 14-16%. Additionally, the company retained the EBIT margin guidance at 22-24%. We expect INFO to continue to gain market share in the current technology upcycle. We have raised the FY22E-FY24E EPS estimates by (0.1)-3.9% (previous note of Mar'21) driven by an improved revenue growth visibility. We retain the BUY recommendation and raise the target price to Rs2,120 (vs. the prior Rs1,920) and value the stock at 28.5x (earlier 27x) FY24E earnings.

Broad-based Growth Across Verticals; Sharp Attrition Spike In Line With Larger Peers

(1) Digital revenue reported a growth of 42.4% YoY and is at ~56% of revenue. (2) INFO reported a broad-based revenue growth across verticals and geographies, and the growth was led by North America and manufacturing vertical. (3) Voluntary LTM attrition in IT services stood at 20.1%, compared to 13.9% in 1QFY22. Management expects the high attrition to ease in the next couple of quarters. (4) During 2QFY22, the company added a net work force of ~11.6k employees. It targets to hire 45k (vs. the earlier 35k target) graduates over FY22. (5) INFO stated it will launch a new company structure in the coming weeks. 6) The board has announced an interim dividend of Rs15/share.

Execution Surprise Led by Operating Efficiencies

INFO reported 2QFY22 EBIT margin of 23.6% (10bps QoQ), which was 110bps higher than consensus, as operating efficiencies (80bps), lower SG&A cost (50bps) and Fx gain (20bps) offset wage inflation (110bps) and a rise in sub-contractor cost (40bps). Additionally, we expect a limited margin upside for FY22 due to a higher SG&A cost (higher attrition and resumption of offices) and accelerated hiring over the next two quarters. We estimate an EBIT margin of 24-24.7% over FY22E-FY24E.

Superior Execution Deserves Premium Valuation

At CMP, INFO trades at 26.4x/23.0x FY23E/FY24E EPS, which is at 10% discount to the larger peer TCS. Going forward, we expect INFO to report a superior growth vs. the top 4 Indian IT peers, driven by a surge in large deals and acceleration in the digital revenue share. Also, a stable management keeps INFO in a better position to make bolder decisions and pursue aggressive market share gain. We believe the stock deserves a rerating, considering the industry-leading double-digit revenue growth, rising share of digital business (56% of revenue), elevated EBIT margin levels vs. pre-Covid levels and a consistent capital allocation policy. Thus, we retain the BUY recommendation. We have shifted to a 1-year target price from the earlier 2-year. As we enter 2HFY22, instead of rolling forward our valuation, we maintain it based on FY24E earnings and shift to a 1-year target price of Rs2,120.

Link to the report

Shares of Infosys Limited was last trading in BSE at Rs. 1715.50 as compared to the previous close of Rs. 1708.75. The total number of shares traded during the day was 495333 in over 20693 trades.

The stock hit an intraday high of Rs. 1784.05 and intraday low of 1698.25. The net turnover during the day was Rs. 860872760.00.

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