Buy Infosys; target of Rs 1250: Motilal Oswal

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26 Aug, 2025 12:21

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Motilal Oswal's research report on Infosys

In-line revenues; optimistic on BFS recovery: 3QFY18 CC revenue growth of 0.8% QoQ was largely in line with our estimate of +1% QoQ. Led by higher furloughs, budget cuts and delayed ramp-ups, a 1.6% QoQ fall in BFS was in contrast to 2QFY18 commentary. However, a pick-up in the vertical starting next quarter, and expectations of a better CY18 v/s CY17 put worries to rest. Superior margin execution continues: EBIT margin of 24.3% (+10bp QoQ) exhibited stability, despite wage hikes for mid/senior management. Strong execution over last three quarters was driven by improved utilization, which at 85% is at its all-time high. With little juice left to squeeze out from this lever, INFO has moved its focus on improving onsite/offshore mix and roll ratios onsite, and fresher hiring onsite to support its cost structure. INFO still maintained guidance of 23-25% EBIT margin. APA boosts PAT: PAT of INR51b included an exceptional reversal of income tax expense provision of USD225m, pertaining to previous periods and no longer required due to conclusion of an Advance Pricing Agreement (APA) with US IRS. Excluding the one-off, PAT stood at INR37b (-0.8% QoQ; v/s est. of INR35.3b, -5.4% QoQ). Consequent to the agreement, INFO's overall effective tax rate is likely to fall 100bp up till FY21, driving minor upgrades.

Outlook

Valuation view - Banking on the comeback: While INFO left its 5.5-6.5% growth guidance unchanged (implying broad range of -0.5% to +3.0% for 4QFY18), expectations of QoQ pick-up lead us to bake in 6% YoY CC growth for FY18 and pick-up in FY19. Also, robust execution and availability of further levers to pull are encouraging cues of stable margins. INFO's performance after its recent upheaval has been steady. Further solidity with leadership/board changes will help shift focus on strategy. Our TP of INR1,250 discounts forward earnings by 16x (16% upside). Maintain Buy.

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