Infosys' Q3FY18 results (Outperformer) - Inline quarter. Constructive BFSI outlook
An inline quarter: Revenue in USD term grew by 1% (+0.8% in constant currency (cc) terms) QoQ to US$2,755mn (IDFCe: $2753m), inline with expectations. Operating margin expanded by 10bp to 24.3% (IDFCe: 24.1%), despite INR appreciation largely aided by offshore drive and utilization uptick. Infosys reported Adjusted EPS (excluding APA tax write-back) of Rs16.2 (IDFCe: Rs16), flat QoQ aided by other income (Q3: Rs9.6bn, which includes tax refund of Rs2bn).
- Developed market performance good: While headline performance was inline with estimates, we note that developed market (North America+Europe) growth was 2.2% and 8.8% QoQ and YoY respectively. Europe was standout performer with 4.7% QoQ CC growth. Metrics trends remains positive, with uptick in utilisation including trainees (+30bps QoQ), better headcount addition (3,251 QoQ) and addition in client buckets.
- Guidance status quo – Infy of old, conservative: FY18 CC term revenue guidance maintained 5.5-6.5%, again inline with expectations. In USD terms, revenue guidance was also retained at 6.5-7.5%. This guidance implies a QoQ growth of -0.5% to 3%, a rather wide and conservative range. It retained margin guidance to 23-25% despite FX headwinds.
- Positive outlook for BFSI: Infosys expects BFSI to return to spending and expects a better CY18 led by better deal pipeline. This has been a drag vertical, and cyclical recovery can drive growth acceleration in FY19.
Key positives: Developed market growth and positive outlook for BFSI
Key negatives: Retail outlook remains mixed
Estimate changes: FY18E reported EPS up +9.5% due to tax write back. Adjusted EPS for FY18E-FY20E largely unchanged.
Valuations & view
Infosys performance was steady, despite leadership exit at the end of Q2. We maintain our view, that cyclical headwinds (BFSI and retail) should abate; and with industrialisation of new tech and execution focussed leadership should drive convergence of growth with the peers. We reiterate our Outperformer rating with March 2019 TP of Rs1250 (16.5x FY20E P/.E).
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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