Buy Infosys; target of Rs 820: Prabhudas Lilladher

Prabhudas Lilladher's research report on Infosys

A clean chit by the independent agency has rest the case of the whistleblower. Infosys reported a narrow miss on revenues up 1% QoQ CC (Ple:1.2% CC/Cons: 1.3% CC) with margin expansion of 20bps to 21.9% (Ple:22.6%, Cons: 22.1%). Deal wins were at USD1.8bn & growth guidance revised for FY20 at 10%-10.5% CC (from 9-10% CC). Steady deal wins of USD1.8bn (renewal being 68%) indicates flattish new deal wins for 9MFY20 YoY excluding Stater. We continue to believe headwinds in retail/BFSI & flattish new deal wins would restrict revenue growth to high single digit. However as compared to TCS, Infy will deliver superior organic growth in FY20E (Infy: 7.8%, TCS:6.9%). Infosys deal pipeline with wallet share gains provides industry leading revenue growth visibility in FY21E. We believe deals like Verizon and Stater as pivot for double-digit revenue growth in FY21/22. With steady revenue momentum, we expect Infosys margin improvement to be aided by onsite utilization, improving onsite-offshore mix, rationalizing sub con cost, automation & pyramid optimization. We expect margin to stay in steady narrow range of ~22% in FY21E/22E.

Outlook

Infosys stock price is still down 10% since the whistleblower allegations took place. Whistleblower allegation was the key overhang on the valuations. Infosys is currently trading at 17X/15.5X FY21E/FY22E multiple which is ~28% discount to TCS multiples'. With the clean chit, strong deal pipeline & margin improvement levers we expect the discount to narrow to 20%. With the modest miss on revenues in Q3 & steady headwinds of BFSI/Retail ahead, we have marginally tuned our estimates & continue to value Infy at 18X multiple at earnings of Rs. 45.5 (Sep-20) to arrive at a changed target price of Rs.820. INFY remains our top pick in tier-1 IT companies.