Infosys’ third quarter revenue growth in constant currency (CC) terms at 2.4 per cent sequentially was strong while its order wins at $3.3 billion was largest since Q3FY21. It also surprised Street with raising of FY23 revenue growth guidance to 16.0-16.5 per t YoY in CC terms, even as it maintained its Ebit margin, much in line with analyst projections. Analysts said while there remains uncertainty over weak global macros, Infosys stock is no longer expensive, which makes risk-reward on the counter favourable.
Large deal wins
Large deal wins of about $10 billion in the last twelve months and guidance upgrade should more than adequately cushion the near-term headwinds from weak macro and assuage growth concerns, said Motilal Oswal Securities. Nuvama Institutional Equities said Infosys is seeing higher contribution of cost-takeout deals and is benefitting from vendor consolidation, even as deal pipeline continues to be robust. The brokerage finds Infosys stock worth Rs 1,900.
“Valuation, being no longer expensive, makes the risk-reward profile attractive,” it said on Infosys shares. The lowest price target on the stock, among a handful of domestic brokerages, stood at Rs 1,161 by Nirmal Bang Institutional Equities.
Sanjeev Hota, Head of Research at Sharekhan said Infosys delivered good set of numbers, with revenues and profits beating estimates. He noted that deal wins were strong at $3.3 billion, highest in the last eight quarters. Also the high points of the quarter gone by was upgrade of revenues guidance to 16-16.5 per cent against 15-16 per cent earlier and drop in attrition rate. On the flip side, margins performance missed estimates and BFSI vertical witnessed fall QoQ.
Uncertain macros
Hota said the management sees pockets of weakness in some key industry verticals, owing to global slowdown and that there are also growing uncertainties in Europe and US.
“We believe uncertain global macro environment will reflect in earnings volatility in FY24E and could restrict material outperformance in near to medium term. Nevertheless given the Infosys strong track record and standing in global IT arena, long term growth outlook remains intact,” he said.
Motilal Oswal has kept its FY23 and FY24 EPS estimates broadly flat, but tweaked is FY25 EPS estimate to account for better growth after the strong Q3FY23 results.
“We view Infosys as a beneficiary of acceleration in IT spends, given its capabilities around Cloud and Digital transformation,” it said while suggesting a target of Rs 1,760 on the stock.
Digital transformation
Kotak Institutional Equities said Infosys’ strength in managing the twin journeys of digital transformation and cost takeout will drive growth leadership. It has raised FY2023-25E EPS by 1 per cent on the back of change in forex forecast. The brokerage has increased its fair value for the stock to Rs1,775 on unchanged target multiple of 25 times.
Margin missed estimates
Elara Securities noted that EBIT margin for Infosys at 21.5 per cent was flat QoQ, missing its estimate of 22 per cent and street estimate of 21.8 per cent. Margin tailwinds are from rupee depreciation (up 40 bps) and lower sub-contracting costs (up 70 bps) were offset by headwinds of higher SG&A (down 30 bps) and seasonality impact (80 bps), resulting in flat margin sequentially.
“We factor in Q3 performance and roll forward to December 2023 EPS. We maintain Accumulate with a raised TP of Rs 1,610 (Rs 1,520 earlier), on an unchanged one-year forward P/E of 21.3 times. Expect a dollar revenue CAGR of 8.2 per cent, an Ebit CAGR of 15.5 per cent and a PAT CAGR of 14.8 per cent in FY23-25E,” Elara said.
Meanwhile, Nirmal Bang, which has a sell rating on Infosys, has increased its target on the stock to Rs 1,161,valuing Infosys at 17.9 times on September 2024 estimated EPS, a 10 per cent discount to TCS target PE multiple.
“As was the case in FY22, when third-party items had added 150 bps to growth, based on our understanding, 9MFY23 seems to have added another 200 bps. The unusually high ‘third-party items for service delivery to clients’ at 6 per cent in 9MFY23 seems to have helped Infosys in winning integrated deals. However, we believe a continuance of this strategy will lead to margin dilutive growth in the times ahead,” Nirmal Bang said.
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Also read: Infosys Q3 results: Profit rises 13.4% to Rs 6,586 crore; FY23 revenue guidance revised upward