Infosys' Q3FY19 results (Outperformer) - Strong beat on revenues but miss on margins; FY19E revenue guidance increased
Q3FY19 results highlights
- Strong revenue beat with miss on margins: Revenue in USD term grew by 2.3% (+2.7% in CC terms, IDFCe: 2.0%) QoQ to US$2,987m (IDFCe: $2,963m), above expectations. EBIT margin came in at 22.6% due to INR 880m of additional depreciation and amortization expenses for Panaya & Skava,adj. for that EBIT margins will be 23% (IDFCe: 24.1%). PAT came at INR 36.1bn (IDFCe: INR 42.7bn) as there is an exceptional loss of INR 4.5bn(US$65mn) due to Panaya, Skava.
- Strong performance across all verticals: Infosys posted a strong performance across all verticals except COMM. Vertical-wise, revenue was led by growth in Financial Services (+3.6% QoQ in CC terms), ENU & Resources (+7.4% QoQ CC), and MFG (+7.6% QoQ CC) verticals, while Retail (-0.1% QoQ CC) and COMM (-0.5% QoQ CC) verticals grew below company avg, with Retail being flattish on seasonal weakness. Management expect retail vertical to rebound in coming quarters.
- CC revenue guidance increased & strong large deal momentum : A big positive was the impressive rise in CC guidance from 6-8% earlier to 8.5-9% currently, reflecting robust underlying traction aided by deal wins and strong digital growth (+5% QoQ in CC terms, 31.5% of revenue in 3QFY19). Deal wins stood in excess of US$ 1.5 bn, up by as much as 102% YoY, following on from US$ 2bn deals signed in 2QFY19; 9MFY19 deal wins stood at US$ 4.7bn, up by 118% YoY vs 9MFY18.
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. Maintain 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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