Infosys' Q2FY20 results (Outperformer) - Relative outperformance versus TCS could continue
Q2FY20 result highlights
- Inline quarter better than TCS: INFO posted CC revenue growth of 3.3% (versus 1.6% q-q at TCS) and EBIT margin increase of 120bps q-q to 21.7%, (versus 20bps q-q decline to 24% at TCS). Qualitatively INFO growth was more broad-based across geographies and verticals, versus skew towards Europe at TCS (14.6. INFO also outperformed on Digital growth at ~38% y-y (versus 28% y-y at TCS).
- Similar demand issues indicated in BFSI/Retail: As indicated by TCS, INFO too sounded cautious on BFSI, especially Europe and capital markets and Retail being affected by delays in decision making and weakening consumer sentiment and spending.
- Unchanged top end growth guidance and low new deal signings, a key disappointment: Retention of top-end guidance of 10% y-y for FY20E was a disappointment, in light of easy asking rate of 0.7% CQGR over 3Q-4Q to meet it. Further, just 10% of the deal wins of USD2.8bn being new business was the other sore point in the results. We find the guidance conservative and expect a raise in 3Q.
Key positives: Strength in Communications, energy & utilities and manufacturing (36% of revenue grew in excess of 15% y-y), strong growth in Digital and margin improvement.
Key negatives: Weak outlook in BFSI/Retail and soft performance, no guidance raise at top end and low net new deal signings.
Impact on financials: 1% EPS increase in FY21/22E on USD-INR reset to 71 (vs 70 earlier)
Valuation and view
We retain Outperformer rating and prefer INFO to TCS given 1) greater certainty on double-digit growth in CC terms in FY20E, with the possibility of raise in guidance in 3Q, 2) Lower dependence on Europe for growth versus TCS 3) likely bottoming of margins, as elevated investments in sales, digital and localisation normalise, and, 4) relative valuation discount of ~10% to TCS on FY21E P/E. We look for USD revenue/EPS CAGR of 8/7% over FY19-21E with 110bps EBIT margin decline to 21.7% over this period. While absolute upside might be limited, INFO’s growth outperformance versus TCS and lower risks given low European skew of growth, can lead to valuations converging over the near term. Our TP rises to INR870 on one quarter roll forward and is based on 20x 1 yr forward EPS upto Sep-21E of INR43.6. Our target multiple is at a 5% discount to our target multiple for 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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