MOSL: INFOSYS (Buy)-Catching up with leading peers on growth-Margin under pressure due to investments and secular trends
Infosys: Catching up with leading peers on growth; Margin under pressure due to investments and secular trends
(INFO IN, Mkt Cap USD42.4b, CMP INR684, TP INR800, 17% Upside, Buy)
- Highest growth in 10 quarters at lowest-ever margin: INFO’s 3QFY19 constant currency revenue growth accelerated to 10.1% (our estimate: 9.0%) from 4.6% YoY CC five quarter ago. Investments, however, continued to take a toll, with the adjusted EBIT margin down 70bp QoQ to 23% (our estimate: 23.5%). Notably, INFO’s EBIT margin has shrank by 210bp over the last eight quarters, during which the INR has depreciated by ~6%. Adj. PAT grew 8% YoY to INR39.9b (1% beat) in 3QFY19. INFO announced (a) buyback of INR82.6b under the open market route at a maximum price of INR800/share and (b) special dividend of INR4/share, in line with its announcement of USD2b payout to shareholders.
- Deals/guidance imply intact revenue momentum: INFO won 14 large deals in the quarter with a TCV of USD1.57b, taking the 9MFY18 deal value to USD4.7b (+2.2x YoY). INFO raised its full-year revenue guidance to 8.5-9.0% QoQ CC, which implies a 4Q ask-rate of 0.3-1.9% QoQ CC (0.5-2.5% as per INFO). This also means that YoY growth will accelerate further to 9.8%-11.6% in 4QFY19.
- Elevated costs weighing on profitability: As we had highlighted in report and also in our commentary post TCS’ , the scarcity of local talent pool at onsite has been driving companies toward more sub-contractors (among other initiatives), thereby impacting margins. INFO missed our margin estimate by 40bp in 2Q and again by 50bp in 3Q (margin now down by 110bp YoY) and the INR has depreciated by 11% over this period. Like TCS, the approach is to prioritize revenues over margins – a trade-off due to limited talent availability.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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