Q2FY24 Review: Infosys: Strong TCV, weak revenue disconnect continues

13 Oct 2023 , 11:52 AM

Infosys (INFO) reported Q2FY24 revenue growth of 2.3% cc QoQ/ +2.5% YoY, above IIFLe of 1.3% cc QoQ. Ebit margins were up 40bps QoQ at 21.2%, in line with IIFLe. However, INFO surprisingly narrowed down its FY24 revenue growth guidance to 1.0-2.5% cc YoY (from 1.0-3.5%), citing continued pressure on discretionary spend and slow decision-making. It implies a Cqgr of 0% to -2% for the next two quarters. Ebit margin guidance of 20-22% was maintained. At US$7.7bn (48% new), deal wins were the highestever (+67% TTM YoY). Analysts of IIFL Capital Services tweak their FY24-26 EPS estimates and maintain analysts of IIFL Capital Services 12-month TP reducing to Rs1,530, based on 20x 2YF EPS. With the second- straight guidance cut, they believe consistent and predictable growth is required for the stock to re-rate. Analysts of IIFL Capital Services forecast 7.5%/10.7% USD revenue/EPS Cagr over FY23-26. Shifting of focus towards recovery in FY25, driven by its order book and an attractive dividend yield (~4%), may provide downside support to valuations. Hence, analysts of IIFL Capital Services maintain BUY, but expect its discount to TCS to remain elevated; and continue to prefer TCS. 

Healthy quarter despite headwinds: 

INFO’s sequential revenue growth improved, led by Life Sciences (10.4% QoQ), Retail (6.9%) and Manufacturing (3.4%) while BFSI (flat), Communications (-0.5%) and Hi-Tech (-1%) remained soft. INFO’s revenue guidance of 1%-2.5% cc YoY in FY24 implies sequential decline in revenues in H2, partly driven by usual seasonality. With another cut in guidance despite record deals wins, its relevance has diminished; they need to display strong execution to regain investor confidence, in analysts of IIFL Capital Services view. 

Margins inch higher, on wage-hike deferral: INFO saw 40bps QoQ improvement in Ebit margins to 21.2%, driven by productivity improvement and deferral of wage hikes. FY24 margin guidance is also a reflection of sub-optimal growth, despite the presence of levers such as cost optimisation, forex and lower sub-con costs. Hiring saw a decline by 2% QoQ, even as attrition collapsed. 

Consistent delivery required for re-rating: 

Analysts of IIFL Capital Services believe INFO may find downside valuation support after a negative stock-price reaction postresult, as focus shifts to cyclical recovery in FY25 and its dividend yield of ~4%. Hence, while they maintain BUY, it is a relative call vs other large caps with continued preference for TCS over INFO, considering the inconsistency in growth and guidance in FY24. Risks: strong INR, attrition.