Infosys Rating ‘Buy’; Below-par performance in Q4FY22

Infosys’ Q4 results missed estimates mainly due to muted growth of 1.2% q-o-q cc. However, its 13-15% revenue growth guidance for FY23 and all-time high net additions reflect strong demand outlook. Mgmt lowered FY23 margin guidance by 100bps to 21-23% due to ongoing cost pressures. We lower our FY23-24 estimates by 3-6% to factor this in and expect Infosys to deliver 14% EPS CAGR over FY22-24. Maintain Buy with revised PT of Rs 2,050 (30x FY24 EPS) on strong growth outlook.

Q4 results disappoint: Revenue of $4.3 bn, up 1.2% q-o-q in CC terms, missed our/consensus estimates. Lower than expected revenues resulted in a sharp 190bps q-o-q decline in EBIT margins to 21.6%, (below our/consensus estimates) and resulted in 2% q-o-q decline in profits to Rs 57 bn, also below estimates. For FY22, Infosys delivered 19.7% y-o-y cc growth with 150bps margin compression to 23%.

Muted Q4 growth…: Infosys’ growth in Q4 disappointed even considering the seasonal weakness. Muted growth in its top-2 verticals (BFSI and Retail) and top markets (North America and Europe) and sharp decline in Life Sciences vertical resulted in the subdued growth performance. Growth in Manufacturing (+5% q-o-q), Communications (+3% q-o-q) and Energy & Utilities (+3% q-o-q) was strong.

…but encouraging FY23 growth guidance: Large deal bookings in Q4 remained in the $2-2.5 bn range at $2.3 bn, of which c.48% were net new. Despite net-new large deals over H2FY22 dropping by 65% y-o-y and a weak exit in Q4, Infosys surprised by giving a growth guidance of 13-15% for FY23. Per mgmt, this reflects strong deal pipeline and expansion of engagements with existing clients. Infosys’ 22K net hires in Q4 were the highest ever. Its FY23 guidance implies 2.7-3.4% CQGR which seems reasonable. We expect Infosys to grow its revenues at 16% – 1% above its upper end of guided range, as it has beaten it by 1-6% every year under the current mgmt .

Sharp margin decline in Q4: Infosys’ margins were down 190bps q-o-q due to higher than expected pass-through costs (90bps margin hit), higher employee costs (30bps margin hit), rise in travel costs (30bps margin hit). Mgmt said that while quarterly annualised attrition is down 5ppts in Q4, wage hikes in FY23 may be higher than last year. We cut our margin estimates by 100-170bps to factor in the miss and expect 21.9% margin in FY22 – slightly below mid-point of guidance range.

Maintain Buy: Infosys trades at 28x 1-yr fwd PE – 10% discount to TCS, despite having 2% higher earnings growth outlook. While we expect the stock to correct post Q4 results, we note that since FY20, whenever Infosys trades at a 10% discount to TCS, its stock has outperformed TCS by 10% in the following 12 months.