Buy Infosys; target of Rs 780: ICICI Direct

ICICI Direct's research report on Infosys

Infosys reported mixed results with revenues above our expectations and a margin miss. Constant currency (CC) revenues grew 2.7% QoQ (vs. our estimate of 2.2% QoQ) led by BFSI, energy & utilities and manufacturing. US$ revenues grew 2.3% QoQ to $2,987 million Reported EBIT margins fell 120 bps QoQ to 22.6%. However, adjusting for 40 bps one-time impact of Panaya and Skava, EBIT margins declined 70 bps QoQ to 23% led by a dip in utilisation, onsite mix (-80 bps), compensation (-30 bps), investments in sales (-30 bps) and acquisition impact (-20 bps). This was partly offset by rupee depreciation (+50 bps) & decline in other expenses (+40 bps) The board declared a special dividend of Rs 4 per share and has announced a buyback under the open market route of Rs 8,260 crore at a maximum price of Rs 800 per share. We are not incorporating buyback in our estimates as of now.

Outlook

Miss at margins and rupee appreciation, prompts us to lower our margin estimates. However, steady growth outlook across most verticals, digital acceleration and deal ramp ups coupled with better valuation of ~15x FY21E EPS (vs ~19X FY21E EPS for TCS) prompt us to maintain our recommendation to BUY with a revised target price of Rs 780 (~17x FY21E EPS).