Accumulate Infosys; target of Rs 782: Prabhudas Lilladher

Prabhudas Lilladher's research report on Infosys

Infosys reported organic CC growth of 2.2% QoQ excluding Stater which accounted to 60bps to CC revenue growth. Strong organic revenue growth was led by telecom & energy verticals. EBIT margins were tad better than our estimates at 20.5% (Ple:20.0%). There was some favorable impact from wage hike deferrals in Q2 & +10bps impact for new lease accounting. Hence, PAT was higher 6% than our estimates. We are positively surprised by the management stance on raised guidance to 8.5%-10.0% CC (from 7.5%-9.5%CC) implying 1.5%-2.5% CQGR for the rest of FY20E. Strong deal momentum of US$2.7bn (55% of the net new) led to the revised guidance. Strong growth in BFSI, Europe & strong deal win was supported by Stater. EBIT margin guidance was maintained at 21%-23% for FY20E, we expect EBIT margins to be at lower end for FY20E. Attrition remained at elevated levels at 23.4% (300bps) which could imply certain execution risks in near-to medium terms. We are confident about Mr. Salil Parekh's leadership & execution but we are cautious about margin expansion due to headwinds such as higher compensation, continued investments & impact on margin due to transition & ramp-up of recently won deals. We have increased our EPS estimates by 4% for FY20E to factor higher contribution from Stater deal.

Outlook

We maintain our Accumulate rating & arrive at an unchanged target price of Rs. 782 valued at 18.5X FY21E earnings. INFY is trading at 19.7x/17.3X FY20E/21E earnings. Attrition control & margin improvement will help in further re-rating.