EUR 850.00 For Business Accounts Only

Morningstar | Infosys Reports 2Q, Retains Full-Year Outlook With Stability Across Regions; Shares at a Premium

Infosys reported a solid second-quarter result and reiterated its full-year constant-currency revenue growth guidance of 6% to 8% and operating margin of 22% to 24%. The quarter was characterized by healthy demand for digital services and good activity within its large clients. In terms of digital services, the business contributed to 31% of total revenue, representing a year-over-year growth rate of 33.5% and a sequential growth rate of 13.5%, both in constant-currency terms. Management noted that digital demand surrounding cloud, "Internet of Things," cybersecurity, and data analytics was strong. We continue to see these technologies as long-term growth drivers for Infosys and believe that the preponderance of the firm’s forecast high-single-digit top-line growth rate will be driven via this ongoing demand. While we see Infosys’ digital business growth being organically led, we expect the firm to make inorganic investments to accelerate and defend its digital position. To that end, the firm announced the acquisition of Nordics-based Fluido to boost its salesforce consulting and implementation business. After accounting for the quarter, we slightly raise our fair value estimate to $8.80 per share from $8.50 based on minor adjustments to our midterm operating margin outlook for this narrow-moat name (our INR fair value moves to INR 630 per share from INR 585, which also accounts for an updated USD/INR rate of 73.28). Still, with shares trading above our fair value, we’d seek a wider margin of safety before investing new capital in the name.

For the quarter, revenue grew 7.1% year over year to $2.92 billion (increased 8.1% in constant currency). Management commented that the demand environment looked stable across the U.S., continental Europe, the U.K., and Australia. We note that there was more encouraging demand commentary around the important banking, financial services, and insurance sector, which remains a key business for the offshore IT services sector and reiterates Tata Consultancy’s commentary last week.

On the operating margin front, Infosys’ operating margin was unchanged sequentially at 23.7% and nearer the high end of management’s expectations. The result was boosted by the depreciation of the rupee, higher pricing, and lower on-site mix, but was counterbalanced by compensation increases, increased subcontractor costs, and on-site localization efforts. We expect the full-year margin to be in the high 23% range and forecast a 24% to 25% operating margin over the midterm.