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Outlook and stock returns
INFO is one of the leading large cap IT companies in India with a market capitalization of Rs 6,37,065 crore. On NSE, the current market price of INFO stood at Rs 1,514 per share. Its 52 week high on 17th January 2022 is Rs 1,953.90 and its 52 week low on 26th September 2022 is Rs 1,355, respectively.
The stock over the past month has performed well as it jumped 5.92%. However, in the last 3 months it has fallen, giving a negative return of 5.37% and in the last year of 11.39%, respectively. It has given multibagger returns of 113.54% in 3 years and 226.77% in the last 5 years.
Investment rationale
Infosys reported CC QoQ revenue growth of +4% to $4,555 million and was driven by digital QoQ revenue growth of +3.8%, while core services were flat sequentially ( +0.4% QoQ). Management is seeing an acceleration of core services, driven by increased demand for cost efficiency and automation programs. We see weakness in retail, high tech, financials (mortgages) and telecommunications as they have started to see transaction related slowdowns in these segments. The manufacturing sector recorded 8.4% quarter-on-quarter growth in USD, with strong figures in Europe as well as the United States. Other verticals performed quite well, particularly in financial services and life sciences, while retail and communications underperformed.
The TCV of large deals signed in 2QFY23 increased 28% year-over-year and was helped by a strong pick-up in cost optimization work. Net new contracts won accounted for 54% of total contracts won, with the remainder being renewals. Growth of 28% may sound impressive but should be viewed against the lower base (weak signings) in the first quarter. Net signatures of large new transactions amounted to USD 1.4 billion in Q2FY23. Hiring moderate in Q2 with +10,000 employees, but total hiring exceeded 43,000 employees in the first half of FY23, resulting in a 100 basis point decline in utilization to hit a multi-quarter low of 76.6% in the second quarter.
EBIT margin increased by 150bps QoQ to 21.5% in 2Q23, above our estimate of 20.2%, supported by +70bps FX, +130bps on the profitability and effectiveness of contracts (lower sub-contract) and -40 basis points on the increase in salaries for senior executives. Management cut its margin forecast to 21-22% from 21-23% earlier. We consider the lower end to be feasible.
Buy for Rs 1,805/share target price
“We have assigned a P/E multiple of 25x to estimated FY24E EPS of INR 72.2 to arrive at a price target of INR 1,805, with an upside of 19.1%. Accordingly, we maintain our rating to a “BUY” for the title,” the brokerage said.
Disclaimer
The stock was selected in KR Choksey’s brokerage report. Greynium Information Technologies, the author and the respective brokerage are not responsible for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.
