EUR 850.00 For Business Accounts Only

Morningstar | INFY Updated Star Rating from 11 Jan 2019

Like peer TCS on Jan. 10, Infosys recorded a good third fiscal quarter with the firm posting double-digit constant currency revenue growth. The performance underlies better momentum for the overall IT services industry and signifies an improvement in some of Infosys’ key business segments such as financial services. The firm’s digital business grew 33.1% in constant currency on a year-over-year basis and constituted 31.5% of Infosys’ total revenue. The digital performance continues to drive the company’s top-line growth rate, and we expect this trend to continue over the midterm as businesses look to Infosys in their digital transformation journeys. 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. Additionally, we see a healthy level of large deal signings ($1.57 billion in the quarter) as an indication that Infosys remains a highly relevant vendor in the global IT services industry. While the firm revised its full-year revenue forecast higher, the impact is negligible, and we had expected the firm to post full-year revenue toward the upper end of its prior guidance. Therefore, we reiterate our $8.80 fair value estimate and narrow economic moat rating (we maintain our INR fair value estimate at INR 630). With shares trading above our fair value estimate, we’d seek a wider margin of safety before committing capital to the name.

For the quarter, revenue grew 8.4% year over year to $2.99 billion (increased 10.1% in constant currency). Management’s second-quarter commentary, which outlined a more encouraging outlook for the important financial services sector, proved true in the third quarter with the firm posting approximately 7.4% year-over-year growth.

In addition, Infosys saw strong growth from its retail, energy & resources, manufacturing, and high-tech industries. The broad-based growth is heartening and clearly signifies relevancy across multiple markets and less reliance on narrow specializations.

In terms of margin, Infosys’ reported operating margin declined 170 basis points year over year to 22.6%. However, the operating margin was impacted by one-off costs associated with the reclassification of assets that were previously held for sale (Panaya and Skava). We don’t see 22% margins as being the new normal and believe that Infosys will be able to modestly improve its margin profile to the 23%-25% range over the midterm.