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In the quarter-ended March 2021, Infosys’ revenue of ₹26,311 crore and EPS of ₹11.96 was about 1 per cent and 2 per cent below consensus expectations, respectively. Operating margin was at 24.5 per cent (vs TCS’ industry leading 26.8 per cent), roughly in line with expectations. Overall, the results closed a solid year for Infosys in the midst of the pandemic with FY21 constant currency revenue growth at 5 per cent (vs TCS’ negative 1 per cent). The company also announced a buyback of up to ₹9,200 crore (1.5 per cent of market cap). The management noted in the earnings call that the buyback will be done via the open market purchases and not the tender offer route.
For FY22, the company has guided for constant currency revenue growth of 12-14 per cent and operating margin of 22-24 per cent. Given heightened expectations driven by Infosys’ better-than-industry performance in FY21, this may not go down well with markets. Consensus expectation for operating margin was at around 24 per cent. Following the results, the ADRs of Infosys listed in US exchanges were trading down by about 5 per cent at the time of writing this piece.
Mixed performance
The performance was good across verticals and geographies. The largest segment — Financial Services — which accounts for around 33 per cent of revenue, reported a solid near 16 per cent year on year(y-o-y) growth in CC terms. Digital business grew 34 per cent y-o-y in CC terms and now represents 51.5 per cent of total revenue.
There are a few metrics that are a tad disappointing though. One, the fourth quarter witnessed slowdown in large deal sign ups at $2.1 billion vs $7.13 billion in the third quarter-ended December 2020. Two, employee attrition rate saw a big jump to 15.2 per cent now vs 10 per cent in the third quarter. That TCS at the same time reported an all-time low attrition rate of just 7.2 per cent for the fourth quarter raises some concerns.
Stock view
Given heightened expectations at an industry-level and more so in the case of Infosys due to its outperformance vs peers in revenue growth in FY21, over all the results are likely to cause some disappointment to investors. The stock currently trades at close to 27 times its FY22 EPS — not cheap for a company with 5 year (FY17 actuals - FY 22 Bloomberg consensus estimate) EPS CAGR of around 11 per cent.
While it trades at discount to TCS PE of near 30 times, it needs to be noted that TCS has always commanded a premium valuation as industry leader with more consistent execution in the last decade. The Infosys stock appears fully priced at this juncture.
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