Result Analysis – Infosys

Result Highlight: 

• Infosys Consolidated Revenue grew 1.28% QoQ and 22.67% YoY to ₹ 32,276 crore – below estimates of ₹ 50263 Crore. In Constant Currency terms revenue grew by 1.2% QoQ. Other income grew 24.41% QoQ to Rs. 637 Crore.

• Operating Profit Margin decline to 21.55% vs 24.48% last year same quarter.

• Net profit rose 12.15% YoY to ₹ 5695 crore for the March quarter compared with ₹ 5078 crore in the same quarter last year. Reported strong free cash flow of ₹ 5769 crore in this quarter.

• Attrition rate was very high in this quarter at 27.7% when compared to 25.5% in last quarter.

• All Industry Verticals Grew YOY.

• Growth among markets was led by North America which grew (+22.27%). Europe grew (+26.69%), Rest of World grew (13.75%), India grew (30.85%).

• TCV: $9.5 Bn and in Q4 deal win stand at $2.3Billion.

• Infy does not have active business relationships with Russian domiciled companies. Through their Russian delivery centers they service global clients based in Russia. Infy is transitioning this business from Russia to other global locations. Infy employs less than 100 people in Russia, miniscule compared to total employee strength of -3.14 lakhs..

• Infy continued its aggressive hiring with highest ever net headcount addition of 21,948, Infosys added 85K fresher’s (27% of FY22 total headcount) in FY22 and have initial target to add 50K in FY23 which can be ramped up depending on demand momentum

• Board approved final dividend of ₹ 16 per share.

 Management commentary: 

• Commenting on the Q4 performance, Salil Parekh CEO and MD.said “With the acceleration of digital disruptions across industries, we see immense potential to engage and partner with clients as they transform, adapt and thrive. We will scale talent globally, invest in employees and accelerate innovation and digital capabilities to capitalize on the expanding market opportunities”,

• Nilanjan Roy, Chief Financial Officer.said “With a robust demand environment ahead, we envisage making appropriate long-term investments in capability building across sales, delivery and innovation. However, we plan to neutralize some of the impact through aggressive cost optimization programs and value led pricing driven by service and brand differentiation. This, along with post pandemic normalization of expenses, is reflected in the margin guidance”,

• Infosys attributed this weakness in revenue to seasonality (fewer working days), Covid-19 impact and a one-off issue connected with a certain client (~100 bps).

• Guidance for FY23:

• Revenue growth of 13%-15% in constant currency

• Operating margin of 21%-23%.

• Share of digital in overall revenue increased to 59.2% in 4QFY22 with continued growth momentum of 38.8% YoY in CC terms. Accelerated investment in the last few years in strengthening the digital footprint and enhancing capabilities helped it to work more closely with clients and capitalize on the expanding market opportunity.

• Infosys launched Infosys Metaverse Foundry, an integral part of Infosys Living Labs to accelerate enterprises’ ability to evolve and execute strategies for virtual-physical interconnections

• Management has indicated that while LTM attrition will continue to increase due to tail effect, quarterly annualized attrition saw a decline of 5%. On the utilisation front, it wants to bring it down to 85%, which will happen through an influx of fresher.

 Outlook:

Infosys result was a disappointment both on the revenue and profit front , biggest negative was the operating margin which came in at 21.6% it was marginally impacted by the one off. Company recorded deal win of $2.3 Billion in Q4.Infosys attrition rate spiked to 27.7% which shows company is facing pressure in retaining its employee and employee cost will remain elevated in coming quarter. Revenue guidance by the company is in line but EBIT margin guidance is below street expectation. The Company achieved highest growth among its peers for FY22 and will  be benefited from digital transformation happening all over the world but as macroeconomics all round the world is deteriorating all over the world it is expected IT companies in India is going to see P/E contraction. At the CMP of Rs. 1748, Infosys is trading at PE multiple of 33.2x FY22 EPS.  Valuing the company at 27x FY24E EPS, we recommend Accumulate on Infosys at lower price for the Target Price of Rs.1850.

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