Infosys: Execution rigour is the mantra for the company going forward

The company should be able to hold on to its margins, a function of greater revenue per employee and lower headcount growth vis-a-vis revenue growth

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Infosys' constant currency revenue growth guidance of 6-8% year-on-year (y-o-y) for FY19 was on expected lines. The marginal beat can be ascribed to a weaker exit in 4Q (0.6% CC) than our expectation (1.5% CC). This implies that the compounded quarterly growth rate (CQGR) will be better if the guidance is met.

To meet its guidance range of 6-8% y-o-y constant currency (CC) revenue growth in FY19, Infosys will have to clock a CQGR of 1.8-2.5% in the next year. We are assuming 7.5% y-o-y CC growth factoring the guidance and incremental revenue from the acquisition. A cross-currency tailwind of 130 basis points (bps) would imply USD revenue growth of 8.8% for FY19.

Net profit grew 2.4% quarter-on-quarter (q-o-q) to Rs 36.9 billion, below our estimate of Rs 38 billion, due to an impairment loss of Rs 1 billion taken in respect of Panaya.

Infosys also cut its FY19 EBIT margin guidance to 22-24% versus the FY18 band of 23-25%. This will largely factor in investments in localised talent, revitalising sales, digital capabilities and delivery staff. The 1% revision amounts to $120 million, and considering that these are investments in people, which will only come gradually, we see the lower end of the margin band as conservative, and expect it to be raised during the course of the year.

The additional $2 billion payout over and above the normal dividend payout (policy of 70% of FCF) will peg the cash returns at a high level (Rs 100/share pre-tax, 8.6% of current market price) for the second year running. This should act as a crucial support for the stock.

Given these developments, we have cut our earnings by around 2% for FY19/20E, factoring in the weaker exit and the marginal profitability decline. Infosys' performance in the recent years has been in line with peers.

The guidance on revenues was on expected lines. However, we believe that the lower end of the EBIT margin band of 22% is conservative, with pricing pressures seemingly tailing off and the share of higher-margin Digital inching up. Our price target of Rs 1,330 discounts forward earnings by 16x. We maintain a 'buy' rating on the stock in the light of the developments.

→ Infosys Q4 Results ←

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