Strong revenue growth, healthy deal wins in Q2FY20: Infosys posted revenue growth of 11.4% on YoY basis and 3.3% sequential growth in constant currency terms for the period of Q2FY20 aided mainly by broad based growth across all verticals. Operating margins have improved by 120 bps to 21.7% sequentially mainly due to higher utilization, improved offshore mix and automation benefits. Infosys revised its full year revenue guidance for FY20 to 9%- 10.0% from previous 8.5%-9.5% and operating margin guidance is also maintained at 21%-23% for FY20. Healthy deal wins, higher growth in key business verticals will put Infosys back on growth trajectory.We recommend Buy with target price of Rs 805.
We upgrade Infosys to BUY as it is trading at an attractive valuation of 16.5x Mar-21 earnings multiple which is 30% discount to TCS & also offering a dividend yield of 3.53%. We value Infosys on Sep-21 earnings at 18x multiple & arrive at unchanged target price of Rs.819. INFY is trading at 19.3x/16.6X/15x FY20E/21E/22E earnings at an EPS of Rs.37.2/43.2/47.8 respectively.
Valuation – Whistleblower allegation an overhang: The stock corrected more than 15% on October 23, after the allegations broke out. Note that in earlier whistleblower allegations in 2017 the stock’s multiple was also de-rated from 20x to 13x. Hence, we believe that the recent issue is likely to loom over the stock in the near term as it would divert management attention and affect performance. Also, any possible senior-level exits owing to the issue would drag down the stock and restrict any re-rating of multiples until clarity emerges. Given its relative outperformance among large peers, we maintain our Buy rating on the stock with a revised price target (PT) of Rs. 780.
Infosys Ltd. reported strong growth in top line and healthy deal wins for the period of Q2FY20. Infosys posted revenue growth of 11.4% on YoY basis and 3.3% sequential growth in constant currency terms for the period of Q2FY20. Deal wins came in strong with TCV of $2.8bn; it remained healthy for yet another quarter. Operating margins have improved by 120 bps to 21.7% sequentially mainly due to higher utilization, improved offshore mix and automation benefits. Infosys revised its full year revenue guidance for FY20 to 9%- 10.0% from previous 8.5%-9.5% and operating margin guidance is also maintained at 21%-23% for FY20. Healthy deal wins, higher growth in key business verticals will put Infosys back on growth trajectory. We assign 16.8x P/E multiple to its FY21E earnings of Rs. 43.4 per share which gives a target price of Rs. 730 per share, an upside of 12%.
In line revenue & better-than-expected margins, accelerating deal TCV, digital growth and scope of margin expansion are key positives. Though we expect revenue growth to moderately surpass the upper guided band, the recent run up in the stock and fully priced valuations prompt us to maintain our HOLD rating with a revised target price of | 855 (based on 19x FY21E EPS).
We stick to our view that Infosys could nose ahead of TCS in FY20 in revenue growth (by ~100-150bps), whilet was behind by ~240bps in FY19. Post 2QFY20, we broadly hold on to our estimates (see Exhibit 2) for FY20/FY21/FY22. EPS is higher on higher other income. We maintain our Sell rating on Infosys with a September 2021 target price (TP) of Rs625 (at a target P/E of 14.9X FY21E EPS, 10% discount to TCS’ target P/E).
We find it difficult for multiple to re-rate from here as there is macro slowdown & demand environment is moderating. We have fine-tuned our estimates & introduced FY22 estimates. We now value Infosys on Sep-21 earnings (earlier Mar-21 earnings) at 18x multiple (earlier 18.5x) & arrive at a changed target price of Rs.819(earlier Rs.780). INFY is trading at 22.9x/18.8X/17x FY20E/21E/22E earnings at an EPS of Rs.37.2/43.2/47.8 respectively.
We upgrade our FY20 earnings estimate by 5%, largely to factor in better margin expectations. Over 1HFY20, INFO had outperformed TCS on growth. However, over the medium term, the performance of these companies is likely to converge.We expect a CAGR (FY19-21) of 9.3% in CC revenue and 11.5% in EPS. The stock price discounts FY20/21 earnings by 21.5/18.5x—10% discount to TCS (on FY21 multiples). Our price target of INR930 discounts forward earnings by 19x, implying an upside of 15%. Maintain Buy.
Q1FY20: Strong revenue growth, Healthy deal wins Infosys Ltd. reported strong growth in top line and healthy deal wins for the period of Q1FY20. Infosys posted revenue growth of 10.6% on YoY basis and 2.3% sequential growth in constant currency terms for the period of Q1FY20. Deal wins came in strong with TCV of $2.7bn; it remained healthy for yet another quarter. However operating margins have declined by 93 bps to 20.5% sequentially. Infosys revised its full year revenue guidance for FY20 to 8.5%- 10.0% from previous 7.5%-9.5% and operating margin guidance is also maintained at 21%-23% for FY20. Healthy deal wins, higher growth in key business verticals will put Infosys back on growth trajectory. We assign 20x P/E multiple to its FY21E earnings of Rs. 43.0 per share which gives a target price of Rs. 860 per share, an upside of 10%.
We maintain our Sell rating on Infosys with a March 2020 target price (TP) of Rs596 (at a target P/E of 14.9x FY21E EPS, 10% discount to TCS’ target P/E). We retainthe 10% discount to TCS. While revenue growth of Infosys is likely to be a tad faster than TCS in FY20 and possibly in FY21 too, TCS will have better margins and RoIC. We reiterate our underweight call on the IT services sector as we forecast a 0% industry growth in FY21 (see sector view on the next page). But within this stance we prefer TCS followed by Infosys and HCL Technologies over the next 12-24 months.
Our earnings estimate for FY20 is up marginally by 1.6% due to the small beat across the board. More significant for valuations was the capital allocation policy change, which will enhance its pre-tax payout yields. We note the contrast in INFO’s 1QFY20 performance to that of TCS – where near-term revenue visibility remained suspect and the growth performance was lopsided in favor of two verticals. Given this – and with payouts converged too – the case for narrowing of the valuation gap gets stronger. We expect a CAGR (FY19-21) of 10.5% in CC revenue and 12.4% in EPS. The stock price discounts FY20/21 earnings by 19.4/16.6—28% discount to TCS. Our price target of INR840 discounts forward earnings by 19x, implying an upside of 15%. Maintain Buy.
Valuation & Outlook: Healthy quarter performance, digital growth, visibility from deal pipeline and improving margin trajectory lead us to maintain our positive stance on Infosys. Further, we believe this would narrow the revenue and margin gap with TCS. However, recent run up in stock prompt us to downgrade the stock from Buy to HOLD with a target price of 845 (based on 19x FY21E EPS).
Infosys Ltd. reported strong growth in top line and healthy deal wins for the period of Q4FY19. Infosys posted revenue growth of 9.1% on YoY basis and 2.4% sequential growth in constant currency terms for the period of Q4FY19. Deal wins came in strong with TCV of $1.6bn; it remained healthy for yet another quarter. In the current financial year total deals TCV stands at $6.2bn. However operating margins have declined by 113 bps to 22.5% sequentially. Infosys revised its full year revenue guidance for FY20 to 7.5%- 9.5% from previous 8.5%-10.5% and operating margin guidance is also lowered at 21%-23% for FY20. The board has recommended a buyback of Rs 8,260 cr at a maximum buyback price of Rs 800per share. Healthy deal wins, higher growth in key business verticals will put Infosys back on growth trajectory. We assign 18.6x P/E multiple to its FY21E earnings of Rs. 43.4 per share which gives a target price of Rs. 807 per share, an upside of 13%.
Even as revenue growth is encouraging, we are nonplussed by Infosys’ margin guidance. FY20E margin will hit its lowest-ever level, and is likely to be ~400bps below the 5-years ago level and >800bps lower than 10-years ago level. While we have consistently maintained our view of ‘good revenue growth but at a cost’, lower-than-expected outlook comes as a negative surprise. Persistently higher attrition rate could also eat away profitability on higher employee retention cost. The stock is up 27% over the past year, and margin challenges are likely to lead to EPS CAGR of <10% over FY19-FY21E. At CMP, the stock trades at >17X FY21E EPS. We downgrade our recommendation on the stock to HOLD from BUY with a revised Target Price of Rs780 (from Rs840 earlier). Cash return in the form of buy-back could prevent the stock from declining steeply (>80% payout in FY19, RoE flattish despite steep margin decline).
We expect the company to generate a topline growth of 9.0%/8.2% in FY20E/FY21E owing to the strong digital business growth supported by a revival in global IT spending (expected to increase 3.5%/2.8% in CY20E/21E). We expect contribution from the new business (deal wins with TCV of USD 1.6bn in 4QFY19) and Stater acquisition to drive top line growth. Partially offsetting this growth will be a weakness in its core business revenue. On the margin front, we expect investments towards scaling digital offerings and increased localization to continue to negatively impact the operating margin in FY20E. However, we expect the company’s buy back plan (~80% allocated capital left unutilized) to act as a support for the stock price. Infosys is currently trading at a P/E multiple of 19.5x/18.5x on FY20E/FY21E earnings. We conservatively apply a P/E multiple of 19.8x to the FY20 estimated EPS of INR 38.4 to arrive at a revised target price of INR 761 per share, an upside of 2% over the CMP. Accordingly, we reiterate our HOLD rating.
Infosys management has guided for CC revenue growth of 7.5-9.5% for FY20E, which is slightly lower than our estimate of 8-10%, though the company kept its EBIT margin guidance at 21-23% for FY20E, which is in line with our estimate. With robust growth in its digital business and Q4FY19 being the second successive quarter of over US$ 1.5 billion large deal TCV, management is positive about the strong demand pipeline in the system. At CMP of Rs 748, Infosys is trading at a P/E of 18.9x its FY20E earnings. We maintain our Accumulate rating on the stock with a revised target price of Rs 849 (21.5x FY20E EPS), an upside of 13.5%.
Infosys’ FY2020E revenue growth guidance of 7.5-9.5% is a touch lighter than expected. This includes contribution from Stater acquisition (the mortgage processing arm of ABN AMRO) though the management did not quantify the magnitude. The company reported that clients are monitoring spends closely and could curtail spends in the event of a slowdown. While growth in large deal TCV has been decent, Infosys’ modest organic guidance of 6.5-8.5% indicates pressure/contraction in renewals. Further the company faces headwinds from wage hikes in H1FY20E and increased levels of attrition.
While a weak exit in terms of margins and a further cut in the guidance naturally raise concerns about the lack of profitable growth, INFO cited that it is the back-ended investments in FY19 that are dragging the FY20 outlook, and that the focus hereon will be on driving efficiency levers. We expect the company to reverse its sequential margin trajectory after 1QFY20 (impacted by wage hikes). Our FY20/21 EBIT margin estimates are 22.2%/22.6%, 40bp/30bp lower. Our USD revenue growth estimate stands at 10% for both the years going forward, and absolute revenue estimate is ~0.5% lower. With a robust performance on deal wins, INFO’s revenue momentum is catching up with leading peers such as TCS, and the recent disappointment on margins should see its worst in 1QFY20, before reversing. Our price target of INR860 discounts forward EPS by 19x (5% discount to TCS). Maintain Buy.
Digital being a multiyear opportunity and relatively less impacted by macro slowdown, will be key growth driver for Infosys. Further, we believe healthy deal wins will enable the company to narrow the revenue and margin gap with TCS. Hence, we maintain BUY rating on the stock with a target price of | 805 (based on 18x FY21E EPS, which is 15% discount to TCS).
We downgrade Infosys to NEUTRAL (from BUY) post its inline revenues in 4QFY19. The growth challenges and margin trajectory compels us to cut estimates by ~5%. Our TP falls to Rs 755 (Rs 805 earlier) at 18x FY21E EPS.
Valuation: Maintain Buy with a PT of Rs. 840: We have tweaked our earnings estimates for FY2020E/FY2021E, factoring in lower-than- expected margin guidance for FY2020E and change in USD/INR rate. At CMP, the stock is trading at 19x/17x its FY2020/FY2021E earnings estimates. With robust TCV signings and improving business visibility, we believe that Infosys would gradually catch up in revenue growth with TCS in FY2020E and in-turn would narrow the valuation gap with TCS going forward. Thus, we maintain our Buy rating on the stock with an unchanged price target (PT) of Rs. 840.
We believe that higher sub-contracting cost, higher attrition, implied investment and localisation in the medium term will lead to margin pressure in FY20 for INFY. We expect INFY to report margins towards the mid-point of its guidance in FY20. We downgrade our earnings estimates by 12%/11.5% for FY20/FY21, primarily because of rupee appreciation and margin headwinds going ahead. We change our rupee assumption to Rs 70 for FY20/FY21 as compared to Rs 74/ Rs 76 earlier which led to major downgrade in our earnings estimate. We downgrade INFY to SELL with revised TP of Rs 700 ( Rs 840 earlier) based on 17x one-year fwd. PER.
We retain our Sell rating on Infosys with a March 2020 target price of Rs601 (at a target P/E of 14.9x FY21E EPS, 10% discount to that of TCS’ target P/E). We had reduced the discount to TCS from 20% to 10% expecting reduction in growth gap. The margin performance does raise issues as to whether such a discount reduction could sustain. While revenue growth of Infosys is likely to be a tad faster than that of TCS in FY20, TCS will have better margins and RoIC. We believe the ongoing share buyback – a substantial part of which is yet incomplete – will cushion any big cuts on the stock. We believe the CEO, Mr. Salil Parekh, had a fortuitous start because of a very good macro in most of 2018 and to everyone’s surprise there was ample revenue acceleration in Year 1 itself. We believe he is going to be tested in FY21 in what would be a more hostile operating environment
Infosys reported inline Q4FY19 revenue performance but sharp miss on margins due to large deal impact & investments on people. Management guided a lower than expected revenue growth for FY20E due to uncertain macro environment. EBIT margin guidance was lowered to 21%-23% from 22- 24%, the lower margin guidance was due to need of investments ahead for demand acceleration. We don’t see guidance retuning back to beat-and-raise strategy as we believe macro environment vulnerability had led to lower revenue guidance. Revenue growth in this quarter was largely led by communication vertical, BFSI & retail both disappointed. If growth acceleration doesn’t happen in BFSI in next 2 quarters, that will lead to our multiple de-rating for Infosys. We are confident about Mr. Salil Parekh’s leadership & execution but we are cautious about margin expansion due to headwinds such as higher compensation, continued investments & impact on margin due to transition & ramp-up of recently won deals. We have cut our EPS estimates by 2.7% & 3.4% of FY20E/FY21E to factor lower than expected guidance & reduced margin assumption (-70bps: FY20E, -92bps: FY21E). Our revised TP stands at Rs.782 (earlier: Rs.808) valued at 18.5x Mar-21 multiple. We expect share buyback (max price of Rs.800) to cushion earnings downgrade in near term. Maintain Accumulate.
Robust business structure, healthy deal pipeline and revitalization of key business segment makes Infosys a safer bet to invest in. Rising demand across geographies and across different verticals helps Infosys to attain higher growth momentum. We have a BUY with a target of Rs. 810