April 21, 2023
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INFOSYS Stock Research Report by Motilal Oswal
Sector: IT Services & Consulting
CMP Rs. 1387, Target Rs. 1520 (10% upside potential)
Target Period: 12 Months
INFOSYS Stock Research Report: Weak Q4 performance to impact FY24 topline delivery
Focus to shift to FY25 after near-term correction
● INFO reported a weak 4QFY23 revenue of USD4.55b, down 3.2% QoQ in CC terms, significantly below our estimate of 0.6% QoQ CC growth. This was primarily due to broad-based reduction in business volumes, led by unplanned project ramp downs and delays in new businesses during the early part of Q4. Additionally, the company saw one-off project cancellations and issues with a few clients, primarily on discretionary spending, which it expects to recover in 1QFY24. Further, TCV for large deals in 4Q stood at USD2.1b, down 37% QoQ.
● As a result of weak 4Q performance, INFO missed its FY23 USD revenue growth guidance of 16.0-16.5% YoY CC, delivering only 15.4% YoY. For FY24, the company has given USD CC revenue growth guidance of 4-7% YoY, citing increased uncertainty for the wider guidance band. This implies a CQGR of 1.5-2.5% between lower and upper end of guidance band, which we consider to be ambitious.
● EBIT margin declined 50bp to 21.0% in 4Q, in line with our estimate. Despite the impact of elevated employee cost, resulting from operating leverage, we found the margin management comforting. INFO guided for FY24 EBIT margin to be between 20-22%, in line with our expectation, and implies flat margin delivery at the mid-point of guidance band.
● We expect the big revenue miss and elevated uncertainty to adversely impact the stock’s short-term performance, resulting in a negative reaction from high single to low double digit, on account of the disappointment.
● The 4Q revenue growth was surprising and is likely to have a dampening effect on the company’s FY24 growth, particularly since it suggests a significant impact on growth from INFO’s discretionary business, which has been facing pressure in the recent few months due to the macroeconomic slowdown. We expect FY24 revenue growth to be around 5.2% YoY in CC terms, which is near the lower end of guidance band, as it takes time for the mega deal opportunities to convert into order and revenues. The delay in revenue growth will likely push the recovery for INFO to FY25, once the demand environment becomes more favorable.
● The weak topline performance should prevent the company from benefitting from easing supply environment, and we expect FY24 EBIT margins at 21.1%, flat YoY. This in turn should result in FY24 INR PAT growth in single digits at 9.3% YoY, despite tailwinds from cross-currency and INR depreciation.
● We have lowered our FY24/FY25 EPS estimates by 4/5% to factor in the 4Q miss and FY24 guidance. We value the stock at 21x FY25E EPS and reiterate our Buy rating on the stock.
INFOSYS Stock Research Report: Weak topline growth and margins; Guidance Disappointed
● In CC terms, revenue grew 8.8% YoY, INR EBIT rose 13%, and INR PAT increased 8% in 4QFY23.
● Revenue stood at USD4.55b, down 3.2% QoQ in CC terms, significantly below our expectation of 0.6% CC growth. Reported USD declined 2.3% QoQ.
● For FY23, INFO delivered USD Revenue/ INR EBIT/ INR PAT growth of 11.7%/ 10.3%/9.0% YoY.
● EBIT margin at 21.1% was down 50 bps QoQ and 20 bps QoQ, below our expectation.
● Given a weak exit of FY23, the management has given a revenue guidance of 4- 7% YoY growth in CC terms, with operating margin band of 20%-22% in FY24.
● In Q4, the company won 17 large deals with 10 in North Americas and 7 in Europe.
● INFO reported a good FCF/PAT conversion ratio of 95% in 4QFY23. Cash and investments stood at USD2.3b
● Net profit declined 7.0% QoQ to INR61.3b (below our estimates).
● INFO announced dividend of INR 17.5/share in 4QFY23 bringing total dividend payout for FY23 at INR 34/ share. Including recent buyback (INR 93,000m), INFO has returned ~86% of Free Cash Flow to shareholders under the current capital allocation policy.
INFOSYS Stock Research Report: Key highlights from the management commentary
● Overall the deal pipeline remains healthy with a few mega deals being actively pursued, which gives confidence to the management to achieve the upper-end of the revenue guided range. Although there have been deferrals in discretionary projects, the demand for cost take-out and vendor consolidation deals are extremely strong.
● Financial Services – The segment was adversely impacted by budget deferrals and delayed decision making due to macroeconomic concern. The softness still continues in the mortgage segment; however, the deal pipeline remained strong for cloud infrastructure and Cyber security, which are seeing better demand visibility.
● Retail – The non-essential retail remains soft, while there is a strong demand in digital transformation to accelerate the topline growth. The customers are reprioritizing their ecommerce spends.
● The company is witnessing two major growth drivers (1) Digital transformation and cloud continue to be the major focus areas; (2) cost efficiency and vendor consolidation deals are the active part of the conversation with clients.
INFOSYS Stock Research Report: Valuation and view
● INFO posted a weak set of earnings in 4QFY23, on account the weak macroeconomic environment and one-time revenue impact during the quarter.
● We expect FY24 revenue growth near the lower end of guidance band, which will restrict margin expansion in FY24.
● Despite near-term weakness, we expect INFO to be a key beneficiary of acceleration in IT spends in the medium term. Based on our revised estimates, the stock is currently trading at 19x FY25E EPS. We value the stock at 21x FY25E EPS, implying a TP of INR1,520.
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