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Motilal Oswal
Infosys (Buy)
CMP: ₹704.5
Target: ₹800
In our recent report on Infosys, we had cited the gestation that one should expect for the company’s revenue-margin duality, given the ongoing investments and the high attrition rate.
2QFY19 performance was a case in point, with CC revenue growth of 4.2 per cent q-o-q (8.1 per cent y-o-y) exceeding our estimate of 3.5 per cent and EBIT margin of 23.7 per cent (flat q-o-q despite currency tailwinds) missing our estimate by 40 bp. PAT of ₹4,100 crore grew 5.9 per cent q-o-q (1.8 per cent q-o-q excluding 1QFY19’s one-off provision), marginally below our estimate of +6.9 per cent q-o-q, primarily due to lower margin.
For FY19/20, we upgrade our revenue estimate marginally by 0.4 per cent/0.7 per cent and lower our EBIT margin estimate by 60 bp/85 bp. The offset implies unchanged FY20 EPS of ₹43.
Infosys trades at 16x FY20E earnings, still at a meaningful discount to TCS. Visibility on revenue growth lent by 2Q execution and deal wins makes a case for some convergence, though the respective executions on margins will continue to warrant a gap. Our TP of ₹800 discounts forward earnings by 17x.
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