Buy Infosys; target of Rs 2250: Prabhudas Lilladher

Prabhudas Lilladher's research report on Infosys

Although the reported growth exceeded our estimates, there was a meaningful pass-through component built into the revenue in 3Q that is unsustainable in 4Q. Additionally, the company anticipates mild furloughs in 4Q that will lead to weaker topline performance, despite the revision in revenue guidance. Barring the anticipated quarterly volatility, the underlying demand is picking up pace. The BFS spending which until now was restricted to the US region, has extrapolated to Europe that is evident through sustainable growth in BFS and improving deal pipeline. Even Retail/CPG vertical is shaping up well with improved consumer sentiment in the US regions. The small size deals (< $50m) reported another quarter of double-digit growth, while the large deal funnel is showing strength. Although the NN component within the deal TCV has improved materially to ~60%, the cost optimization theme is still being prioritized over transformation initiatives. We believe the improved demand scenario beyond BFS and elevated deal TCV with higher NN component would help drive growth in FY26/FY27. Considering the meaningful pass-through component and extended furloughs, we are expecting a revenue de-growth in 4Q, which will translate to FY25 growth of 4.8% YoY CC. We are baking in revenue growth of 7.7%/11.8% YoY CC in FY26E/FY27E. EBIT Margins in 3Q was fairly in line with our estimates. Weak anticipated topline growth along with partial wage revision (for junior) scheduled in Q4, will have an incremental impact on margins. Having said that, the comprehensive margin expansion program (Project Maximus), pyramid rationalization, offshoring and automation would negate some of the margin impact. Hence, we are keeping our margin estimates broadly unchanged at 21.0%/21.6%/22.2% in FY25E/FY26E/FY27E.

Outlook

INFY has a robust play on the front-end offering and execute on the large-size transformation deals. With improving discretionary spends, we expect the global enterprises to resume their long-deferred discretionary programs, where INFY would be wining disproportionately among its peers on quality execution and full-stake offerings. We estimate USD revenues/earnings CAGR of 7.5%/12% over FY24-FY27E. The stock is currently trading at 23x FY27E, we are assigning P/E of 27x to FY27E with a target price of INR 2,250. We maintain BUY.