Buy Infosys; target of Rs 790: Prabhudas Lilladher

Prabhudas Lilladher's research report on Infosys

Infosys 2QFY19 results were a mixed bag. Revenues at USD2921mn were up 3.2% QoQ and above our estimates (Ple: USD2890mn). Constant currency growth for the quarter stood at 4.2% which is above our estimates (Ple: 2.9% cc growth). This is in comparison with TCS which delivered 3.7% QoQ constant currency growth for the quarter. Hence, Infosys has outperformed TCS on the revenue growth front in 2QFY19. EBIT margin came at 23.7% QoQ and below our estimates (PLe: 25.0%). Tailwinds from INR depreciation were negated by headwinds from wage hikes (for the remaining 15% of employees not covered in 1Q) and continued uptick in subcontracting expenses. Subcontracting expenses stood at 7.4% of total revenues as on 2QFY19 (vs 5.9% as on 3QFY18). PAT came at Rs 41.1bn was 1.5% below our estimates (Our ests: Rs41.7bn) led by margin miss.

Outlook

Hence, our estimates are retained at Rs37.7/42.4/45.5/sh for FY19/FY20/FY21E. Infosys trades at 16.3x FY20E EPS and 15.6x Sep20E EPS. Infosys trades at 22% discount to TCS. We believe Infosys valuations are reasonable considering the improving growth trajectory. We see possibility of Infosys narrowing its discount wrt to TCS owing to improved growth and strong aggression on deal wins. Our TP is retained at Rs790/sh (18x Sep20E EPS).