Buy Infosys; target of Rs 800: Motilal Oswal

Motilal Oswal's research report on Infosys

INFO’s 3QFY19 constant currency revenue growth accelerated to 10.1% (our estimate: 9.0%) from 4.6% YoY CC five quarter ago. Investments, however, continued to take a toll, with the adjusted EBIT margin down 70bp QoQ to 23% (our estimate: 23.5%). Notably, INFO’s EBIT margin has shrank by 210bp over the last eight quarters, during which the INR has depreciated by ~6%. Adj. PAT grew 8% YoY to INR39.9b (1% beat) in 3QFY19. INFO announced (a) buyback of INR82.6b under the open market route at a maximum price of INR800/share and (b) special dividend of INR4/share, in line with its announcement of USD2b payout to shareholders.

Outlook

However, given the cost challenges, we trim our FY19/20/21 EBIT margin estimate by 42/62/44bp to 23.3/22.8/23%. Our earnings estimates are down by 0.3-1.6% as a consequence. INFO’s impressive catch up on revenue growth with industry leaders is encouraging, while challenges on the margins are secular. 3QFY19 performance will make a case for the narrowing of the valuation gap with leading peers such as TCS, in line with our thesis. Our price target of INR800 discounts forward earnings by 18x, implying a 17% upside. Maintain Buy.