Accumulate Infosys; target of Rs 782: Prabhudas Lilladher

Prabhudas Lilladher's research report on Infosys

Infosys reported inline Q4FY19 revenue performance but sharp miss on margins due to large deal impact & investments on people. Management guided a lower than expected revenue growth for FY20E due to uncertain macro environment. EBIT margin guidance was lowered to 21%-23% from 22-24%, the lower margin guidance was due to need of investments ahead for demand acceleration. We don't see guidance retuning back to beat-and-raise strategy as we believe macro environment vulnerability had led to lower revenue guidance. Revenue growth in this quarter was largely led by communication vertical, BFSI & retail both disappointed. If growth acceleration doesn't happen in BFSI in next 2 quarters, that will lead to our multiple de-rating for Infosys. 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 cut our EPS estimates by 2.7% & 3.4% of FY20E/FY21E to factor lower than expected guidance & reduced margin assumption (-70bps: FY20E, -92bps: FY21E).

Outlook

Our revised TP stands at Rs.782 (earlier: Rs.808) valued at 18.5x Mar-21 multiple. We expect share buyback (max price of Rs.800) to cushion earnings downgrade in near term. Maintain Accumulate.