Infosys' Q1FY19 results (Outperformer) - Steady quarter with strong large deal wins
Q1FY19 results highlights
- An inline quarter: Revenue in USD term grew by 0.9% (+2.3% in constant currency (cc) terms) QoQ to US$2,831m (IDFCe: $2,836m), inline with expectations. Operating margin declined by 100bps QoQ to 23.7% (IDFCe: 23.3%). Infosys EPS (excluding write-off) of Rs 17.8 (IDFCe: Rs16), +17.2% YoY.
- BFSI performance soft but commentary better: While headline performance was inline with estimates, we note that commentary around Americas and BFSI was better. Metrics trends were a bit mixed with higher attrition with but headcount addition (5,798 QoQ) and addition in $100m client buckets was good.
- CC revenue guidance retained but large deal momentum good: FY19 CC term revenue guidance was retained at 6-8% (includes Wongdoody acquisition now), inline with expectations. However despite EBIT margin beat in Q1, Infosys retained its EBIT margin outlook of 22%-24% which appears conservative to us. Importantly large deal wins were strong at US$1.1bn (US$905m in Q4FY18 and US$657m in 1QFY18) and most of this came in Americas. Additionally 47% of the large deals are new indicating better traction going ahead.
Key positives: Large deal wins and EBIT margin performance
Key negatives: Flat BFSI performance in this quarter.
Estimate changes: FY19E/FY20E reported EPS changed +1.7%,2.9%
Valuations & view
Overall a steady quarter from Infosys with slight beat on margins. Importantly guidance is inline with expectations, although decision to retain the lowered margin guidance band seems conservative considering Q1 has been at the top-end of the band and there shouldn’t be additional headwinds through the year. Further rising contribution from BFSI in large deal wins coupled with better commentary is soothing. We maintain our positive view on the stock as execution focussed leadership should drive convergence of growth with industry; and valuations at 16.2x FY20E are inexpensive. Reiterate Outperformer with a revised March 2019 TP of Rs1550 (19x FY20E P/E -15% discount to TCS).
Infosys is a global technology services company based in India. Co. provides business consulting, technology, engineering and outsourcing services. Co.'s end-to-end business solutions include: Consulting and Systems Integration - consulting, enterprise solutions, systems integration and advanced technologies; Business IT Services - application development and maintenance, independent validation services, infrastructure management, engineering services comprising product engineering and life cycle solutions and business process management; and Products, business platforms and solutions, including Finacle™, which addresses core banking, mobile banking and e-banking needs of banks worldwide.
IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.
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