Infosys reported relatively weak results for Q4FY21 with revenue up 2% q-o-q compared with the strong 4-5% growth for the past two quarters. However, the result doesn’t change our 14-15% growth expectation for FY22e as the company realises $14 bn in deal wins (TCV) in FY21 (up 57% y-o-y).
Guidance is for 12-14% y-o-y revenue growth in constant currency terms for FY22. The pipeline is healthy, according to Infosys, and a couple of large deal wins in FY22 could improve the visibility for FY23 as well. More importantly, the Ebit margin guidance of 22-24% is in line with our expectation and comforting in light of the impending margin headwinds. Pricing is stable as has been our view, and it is unlikely to change much going forward.
Investment thesis – sector and Infosys: The recovery in the recent quarters has been unprecedented and appeared to have positively surprised everyone. However, most of it now already appears in the price as well as the expectations for the overall sector. The fact remains that visibility into FY23 is still low and one can’t be confident the low teens growth will continue in FY23. Consequently, we think the Q1FY22e results will be the key trigger and provide some visibility on the sustainability of the recent upcycle.
Unless there is a big upside surprise in Q1FY22e, we think the sector will remain at the mercy of INR trends, and given the relative positioning of Infosys to rest of the market, we believe the shares represent a risk-off trade in the near term. We believe the big earnings upgrade cycle is behind for the sector and stocks are likely to move in line with our earnings growth expectations of 10-12% for the next two to three years. In that context, we like Infosys on its relatively inexpensive valuation to TCS and higher visibility on growth and margins. It continues to gain market share and should continue to grow strongly over the coming years.
Q4FY21 details, earnings and valuations: Infosys is seeing strong demand from its banking clients as banks invest in improving customer experiences, digitisation and end-to-end transformation of back-office processes. Positively, Retail, which was weaker in FY21, is gradually improving every quarter, and Infosys is optimistic of a stronger performance in Retail in FY22. For Manufacturing, Infosys remains positive on the Auto sector after winning some large deals in FY21. The TCV for Q4 was at $2.1 bn, low compared with recent quarters but still a rise of 27% y-o-y. We update our estimates to factor in the INR depreciation but offset by lower other income due to higher shareholder payouts, which overall leads to a modest 1% increase in our FY22e earnings. We retain our Buy and lift our TP to Rs 1,590 from Rs 1,580.