Infosys’ September quarter (Q2) results further validated its leading position in the industry on multiple financial and operating metrics that started taking root a few years ago under the new management. The results beat consensus expectations on most metrics for the quarter.

Revenue was inline versus consensus, and the y-o-y constant currency (cc) revenue growth at 18.8 per cent was best amongst peers (TCS, Wipro and HCL Tech at 15.5, 12.9 and 15.8 per cent, respectively). Operating profit beat expectations and was nearly 4 per cent above, with a good 140 basis point improvement in operating margins sequentially at 21.5 per cent. At the time of June quarter results, operating margin was a disappointment across companies in the IT services sector as cost pressure took a toll.

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Infosys Q2 FY23 results
EPS growth

While companies have started showing improvement on this metric in current quarter (except Wipro which reported a flattish trend), Infosys has shown best improvement on this metric amongst large players. Y-o-Y EPS growth at 11.5 per cent was also best amongst peers when compared with single digit growth reported by TCS and HCL Tech. On the negative front, attrition remains high at 27.1 per cent, although it has improved compared to the last quarter.

Growth during the quarter was broad based with good momentum seen across geographies and verticals. High growth digital revenues now represents 61.8 per cent of total revenues (y-o-y growth of 32 per cent in cc terms) and accounted for the entire growth witnessed in the quarter.  

The company also marginally increased revenue outlook at the mid-point with revised FY23 cc revenue growth guidance of 14-15 per cent versus prior 13-15 per cent. Operating margin guidance was trimmed to 21 to 22 per cent versus the prior 21-23 per cent (in line with expectations). The management noted that while concerns on economic outlook persist, demand pipeline remains strong.

Investor takeaways

The buyback announced will not move the needle in terms of fundamental impact on the valuation of shares as it represents a mere 1.5 per cent of its current market cap. In 2021, Infosys completed buyback at the maximum authorised price of ₹1,750 and the shares today are trading much lower.

Infosys shares currently trade at a one-year forward PE of 22.6 times. The 25 per cent correction in the stock price year-to-date has resulted in multiple compression that ideally brings it closer to value zone. Further, its industry-leading performance on many parameters (except margins where TCS is better), makes a case for its 11 per cent valuation discount with TCS to shrink. However, given macro uncertainties and surge in global interest rates which may cause further compression in valuation multiples, investors can wait and watch for now.