HDFC Securities Institutional Research Desk: Report on Infosys - On the back foot

Apurva Prasad, Institutional Research Analyst, HDFC Securities and Amit Chandra, Institutional Research Analyst, HDFC Securities.

The near-inevitable happened, but Infosys' (INFO) Q4 can pass on as an aberration even as macro headwinds persist. The low probability sequential decline (eight times in the last sixty quarters and four times ex-GFC and Covid quarters) was due to a combination of deal cancellations and deferrals largely centric in NorthAm (BFSI & communication vertical in NorthAm was 70% of the sequential drop). So the cut in estimates is a bigger function of the FY23 exit rate rather than the guidance provided (4-7% CC). We reckon that there's a high probability of INFO delivering the mid-point of its guidance band and improving its growth trajectory beyond. We also believe that there's a low probability of structural risk to the margin. However, recent senior-level exits and the possibility of continued stress from large accounts are risks to growth. We cut estimates by 4-5% and downgrade INFO to ADD (from BUY earlier). Our revised TP of INR 1,470 is based on 21x Dec-24E (25x earlier) which is ~20% discount to TCS' valuations based on relative growth discount.

Guidance not as bad: The annual guidance is not as bad as it seems - we were expecting 5 to 8% CC guidance (guidance of 4-7% CC). What's more important is the implied growth rate between quarters is a strong 2.3% CQGR which is similar to its last 15Y average. So it's essential to notice the nuance between the annual guide (which is the third-lowest in the last 15 years), and (more importantly) the sequential growth built-in which is similar to the historical average. Similar sequential growth in FY25E takes the full-year growth to double digits. We now expect INFO's growth below TCS for FY24E which is also based on the portfolio mix (relative differential between NorthAm and UK portfolio and the relative weakness and strength in those geographies).

High probability to deliver guidance mid-point or above: So what gives us the confidence that INFO can deliver the mid-point of its guidance in FY24E: (1) High correlation between historical net new large deal bookings and incremental revenue implies high probability for USD 970mn incremental revenue (vs. 5Y/10Y average of 1.45bn and USD 1bn incremental revenue); (2) increase in cost optimisation deals reflected in better trajectory in core services (flat sequentially vs. declining 1-2% sequentially pre-Covid), supported by full stack offering + offshore leverage and highest-ever large deal pipeline including mega deals (although slower decision cycle); (3) notwithstanding the Q4 shocker and the non[1]sacrosanct nature of guidance, INFO's execution has an impressive track record - upward revision or static guidance across quarters in >80% of the quarters since FY10 and historically (last 15Y) the company has beaten its annual guidance by 1.5% (exhibit 2 & 3); (4) industry estimates of strong contracting activity persist which is in sync with INFO's commentary on pipeline; the delay in conversion and ramp-downs of some large accounts are more short-term in nature or have a pent-up element.

Shares of Infosys Limited was last trading in BSE at Rs. 1388.60 as compared to the previous close of Rs. 1428.45. The total number of shares traded during the day was 609878 in over 44382 trades.

The stock hit an intraday high of Rs. 1413.00 and intraday low of 1383.60. The net turnover during the day was Rs. 850053027.00.