Buy Infosys ; target of Rs 1050: Motilal Oswal

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Motilal Oswal 's research report on Infosys

Infosys’ 1QFY21 revenue and margin performance reflect its unparalleled resilience in navigating COVID-19-led disruption. Supply-side challenges were managed better than even TCS (10% impact for Infosys v/s 20% for TCS). Despite a higher variable payout (100bp impact), robust EBIT margin expansion (+150bp QoQ) was a key positive. Deal wins (~USD1.7b, ex-Vanguard) and the deal pipeline are healthy. The reinstatement of revenue (0–2% YoY, CC) and margin (21–23%) guidance is a key morale booster. As the company and its clients have been through the COVID-19 learning curve, we understand the company should be able to manage revenue/margin performance within a narrow band despite incremental risks, such as a second wave of infections, the re-imposition of lockdown, etc. We upgrade our FY21/FY22E EPS estimates by 11%/12% as we adjust our EBIT margin trajectory to the beat in 1QFY21. Infosys should be a key beneficiary in terms of recovery in IT spends in FY22. Additionally, sub-optimal EBIT margin levels and headroom for margin expansion, led by back-ended productivity benefits, should translate into strong outperformance on EPS growth (v/s the sector). Reiterate Buy.

Outlook

As its outperformance v/s TCS continued in this quarter, we expect the valuation divergence to narrow (to 10%). On our revised estimates, the stock is currently trading at 20x FY21E EPS. We value the stock at 22x FY22E EPS. Political uncertainty in the US further impacting IT spending decisions in key verticals such as BFSI and Retail is a key monitorable risk.

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