Infosys' Q2FY19 results (Outperformer) - Good revenue momentum but margin miss
Q2FY19 results highlights
- Strong revenue beat with miss on margins: Revenue in USD term grew by 3.2% (+4.2% in constant currency (cc) terms, IDFCe: 2.7%) QoQ to US$2,921m (IDFCe: $2,881m), above expectations. Operating margin increased by 3bps QoQ to 23.7% (IDFCe: 25.1%). Infosys EPS of Rs 9.4 (IDFCe: Rs9.5), +15.9% YoY.
- Strong performance across all verticals: Infosys posted a strong performance across all verticals except communications. Management mentioned demand environment is improving in financial services in US. BFSI posted 5.8% QoQ CC growth, retail also posted a strong growth of 5.9% QoQ CC growth.
- CC revenue guidance retained but large deal momentum good: FY19 CC term revenue guidance was retained at 6-8% inline with our expectations. Importantly large deal wins were strong at US$2 bn in Q2FY19 (US$1.1bn in Q1FY19 and US$731m in Q2FY18) and most of this came in Americas & BFSI. Additionally 60% of the large deals are new indicating better traction going ahead.
Key positives: Large deal wins and BFSI performance
Key negatives: Margin performance.
Estimate changes: FY19E/FY20E/FY21E unchanged EPS.
Valuations & view
Overall a good quarter from Infosys with beat on revenues both USD and CC. Further this has been flanked by strong large deal wins, which gives greater confidence on growth acceleration from FY19E to FY20E. Margin miss is tad disappointing, but we think these are investments for growth and scale and growth acceleration should allow the company to recoup some of the margin drop. We maintain our positive view on the stock as execution focussed leadership should drive convergence of growth with industry. Reiterate Outperformer with a unchanged December 2019 TP of Rs830 (19x 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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