BUY
TARGET PRICE (Rs) : 1,750
Infosys reported a disappointing operating performance in Q4. Revenue declined 2.2% QoQ in cc terms, falling short of our expectations. Weakness was on account of persistent muted discretionary spending, along with a one-time impact of ~100bps due to re-scoping & re-negotiation with a large BFSI client. EBITM declined by 40bps QoQ to 20.1%, while adjusted for one-off impact from rescoping of a large BFSI contract, EBITM at ~21.1% fell slightly below our estimate of 21.4%. Large-deal TCV in Q4 was healthy at USD4.45bn, of which 44% is net new. Company has guided for revenue growth of 1-3% cc in FY25 (implying CQGR of 1.1-1.9%), with EBITM of 20-22%. Mgmt suggested that discretionary spending remains weak, as seen in H2FY24. Even after lowering revenue growth guidance through FY24, Infosys missed its implied Q4 guidance which raises concerns on growth predictability. We cut FY25-26E EPS by 6-6.5%, building in the Q4 miss, lower guidance, and higher ETR. Continual performance miss is likely to weigh on the stock, but valuation is not demanding (~5% FCF yield). We retain BUY with TP now at Rs1,750, on 25x Mar-26E EPS.
Results Summary
Infosys’s revenue declined 2.1% QoQ (down 2.2% in cc terms) to USD4.56bn, coming in below our estimate of USD4.64bn and missing Company’s implied guidance. If not for the one-time impact from re-scoping of a large contract, Company would have delivered growth within its guided range. Reported EBITM declined by 40bps QoQ to 20.1%, logging below our estimate of 21.4%. Both, revenue and margin, saw a 100bps impact due to renegotiation and rescoping of a large contract with a BFSI client. Margins were also negatively impacted, by 80bps, due to wage hikes implemented in Nov-23, higher brand building, and visa expenses offset by tailwinds from lower provision for client receivables (60bps), benefits of project Maximus (40bps) and lower impact from the cyber security incident (40bps). Among verticals, BFSI (-7.1% QoQ), Retail (-4.1%), Manufacturing (-3.4%), and Life Sciences (-6%) saw a decline, while Communications (5.6%), Hi-Tech (10.6%), and ERU (0.1%) saw growth. All geographies witnessed a decline on sequential basis, with North America and Europe down 1.1% and 0.7%, respectively. Deal-win TCV was healthy at USD4.45bn. Total headcount declined 1.7% QoQ to 317,240. Company has declared a final dividend of Rs20, along with a special dividend of Rs8 per share. What we liked: Healthy deal intake, cash conversion (FY24 OCF/EBITDA: 71.6%), further reduction in LTM attrition (12.6% vs 12.9% in Q3). What we did not like: Operating performance miss; lower revenue guidance for FY25.
Earnings Call KTAs
i) In Q4, Company had re-scoping and renegotiation of one of the large contracts in the BFSI segment, leading to a one-time impact of ~100bps in Q4. Nearly 85% of the scope of the contract continues as-is. Management indicated this to be an isolated incident. ii) Company continues to witness macroeconomic effects (high inflation and interest rates) in BFSI, in turn leading to cautious spending by clients. iii) Management expects the normal seasonality to play out in FY25 per its guidance, i.e. H1 to be stronger than H2. iv) Communication clients maintain a cautious approach amid growth concerns and challenges. Growth in coming quarters will be led by ramp-ups of previously won deals. v) Micro-concerns in Hi-tech persist, leading to delay in deal closures, decision-making, and clients' repurposing spend. Discretionary programs have been kept on hold. vi) Company expects FY25 growth to accelerate from FY24 levels in Financial Services and Telecom, due to large-deal wins. Manufacturing, while still showing healthy growth, will see lower growth vs FY24. Hi-tech is expected to remain soft. vii) Effective FY25, Company expects to continue its capital allocation policy of returning ~85% of FCFs cumulatively over a 5-year period (FY25-29). viii) It acquired in-tech, a leading ER&D services provider focused on the German automotive industry, for a cash consideration of EUR450mn (EV/S 2.6x). The acquisition is expected to close during H1FY25.
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