EUR 850.00 For Business Accounts Only

Morningstar | Infosys' Large Deals Perform Well for Fiscal 2019; Maintaining $8.80 FVE

Infosys reported nice results for the fourth quarter. Highlights included the doubling of large-deal total contract value and hefty growth in digital-related revenue. However, employee attrition continues to be a problem for its employee base of three to five years’ tenure. Nonetheless, we think Infosys is continuing to obliterate its perception as a slow-moving legacy business with its digital strategy and new go-to-market approach. We’re maintaining our $8.80 fair value estimate and narrow economic moat rating (we maintain our INR fair value estimate at INR 630).

For the quarter, revenue grew 9.1% year over year to $3.1 billion (11.7% at constant currency). Infosys’ retail, energy, utility, resources and services, manufacturing, and high-tech sectors continued to drive major growth, reporting growth in the double digits. Digital revenue grew by 41% in the quarter, year over year, now constituting a third of total revenue. This strength was largely driven by clients’ digital transformations and interest in “Internet of Things” and data analytics. However, the company’s life sciences sector continues to lag due to increasing cost concerns for clients. Quarterly results closed out full-year revenue at $11.8 billion, growth of 7.9% year over year.

Infosys’ reported operating margin of 21.5% for the fourth quarter, down sequentially from 22.6% in the third quarter given lower utilization of employees, as the employee base increased in anticipation of large new deals, and investments in expanding its localization efforts, in countries such as the U.S. and Australia. For fiscal 2020, Infosys projects 7.5% to 9.5% in revenue growth in constant currency and operating margins of 21% to 23%--which we estimate could be on the higher end if the company decides to tackle the 50-basis-point increase in attrition.