News Analysis

Infosys: Momentum is unhindered, but factored into valuation

Hari Viswanath BL Research Bureau | Updated on July 15, 2021

Revenue guidance increase offsets modest disappointment in operating margins

In line with the trend in recent quarters, Infosys has delivered good performance in Q1FY22 too, with revenue (₹27,896 crore) around 1 per cent above consensus (Bloomberg). Some might view its operating margin of 23.7 per cent (vs expectations of about 24.4 per cent) a modest disappointment. Its earnings per share (EPS) of ₹12.24 missed expectations by around 2 per cent. However, overall, this will likely be offset by company increasing its FY22 constant currency (CC) revenue guidance growth to 14-16 per cent vs earlier guidance of 12-14 per cent. The company maintained its FY22 operating margin guidance of 22-24 per cent.

For the quarter, Infosys’ CC revenue grew 16.9 per cent versus TCS’ 16.4 per cent. While both companies benefited from base effect (given Q1 FY21 bore the brunt of Covid impact on businesses), Infosys’ growth in Q1 needs to be viewed as much better performance. The base effect benefit for Infosys was lower (in Q1 FY21 Infosys constant currency revenue grew 1.5 per cent vs negative 6.3 per cent for TCS). In terms of margins performance, however, TCS’ lead remains undisputed with operating margin at 25.5 per cent in Q1 FY22.

Infosys’ digital segment delivered a very robust performance, growing 42 per cent y-o-y in CC terms. It now represents a solid 54 per cent of revenue. That overall revenue grew 16.9 per cent despite digital growing at over 40 per cent, is a telling story on the fast pace of decline in legacy businesses of IT services firms and the structural transformation happening at a faster pace within the industry.

In terms of geographies and verticals, the company saw growth across the spectrum.

Valuation holds good

We had recommended a book profit call on Infosys earlier in June and with results largely on expected lines, we do not see any reason to change the call. Our call was primarily based on valuation, and it holds good. Based on its closing price of ₹1,577 on Wednesday, the stock trades at 1 year forward PE of 29 times (Bloomberg consensus) versus 5-year average of 18 times. Both the absolute PE and relative premium of 60 per cent to historical average are not justified by its current growth prospects – around 14 per cent revenue CAGR for FY21-23 (need to factor that 14 per cent comes with benefit of base effect in Covid-impacted FY21). Hence, for long-term investors, from these levels the risk-reward does not appear to be in favour.

Published on July 14, 2021

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