Infosys Share price: CLSA says Results in Q3 FY21 indicate improved confidence on margin defence, target raised to Rs 1620
Infosys Share price: Infy reported a strong US $5.2bn in net new large-deal wins in Q3 FY21 that positions it well for 15% US$ revenue growth in FY22. Management expects to offset associated margin headwinds from transition costs and passthrough revenue in such deals via a combination of operating leverage and improved profitability in previously won deals. CLSA pulled back their conservative FY22/23 margin stance, raising EPS estimates 4/5%.
Infosys Share price: Infy reported a strong US $5.2bn in net new large-deal wins in Q3 FY21 that positions it well for 15% US$ revenue growth in FY22. Management expects to offset associated margin headwinds from transition costs and passthrough revenue in such deals via a combination of operating leverage and improved profitability in previously won deals. CLSA pulled back their conservative FY22/23 margin stance, raising EPS estimates 4/5%. Evidently, increased sales aggression and best-in-class execution are helping Infosys gain disproportionate share as clients explore cost-takeout deals to fund digital spending, making Infosys one of the best plays on the theme. CLSA reiterates BUY rating on Infosys and raises their target price to Rs 1620 from Rs 1480.
Infosys Results in Q3 FY21 were well above expectations:
Infosys consolidated revenue grew 6.2% QoQ in US$ terms in Q3 FY21, above our/consensus estimates (3.5/3.3%), helped by a ramp-up in the Vanguard deal (US$1.5bn, according to media reports), even as accelerated digital technology adoption kept growth strong across most verticals. Infosys Ebit margins were stable QoQ at 25.4% - the highest in more than four years and above consensus estimates of 24.9% - due to sharp increases in utilisation (2.7% QoQ) and offshore delivery share (0.9%) even as other execution costs such as travel and sub contractors remained in a narrow range around levels reset in Q1 FY21. PAT, at Rs 52 bn (up 16.5% YoY), was about 0.9% above CLSA’s estimate.
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Infosys Strong deal wins and an optimistic outlook:
Infosys reported 22 large-deal wins with a combined US $7.13 bn total contract value (3x YoY) in 3QFY21. Management said the deal pipeline remains healthy, normalised for the mega deal from Daimler (US$3.2bn, according to media reports). Management raised guidance for FY21 constant-currency revenue growth from 2-3% to 4.5-5.0% and EBIT margin band from 23-24% to 24-24.5%. While the revised Infosys FY21 constant-currency revenue growth guidance of 4.5-5.0% implies deceleration in 4QFY21 (0.6-2.5%), CLSA attributes this to normalisation and management conservatism after strong momentum in Q2 - Q3 FY21.
CLSA believes Infosys Q3 FY21 revenue and deal-win momentum will help Infosys exit FY21 at the high end of the guided growth range and provide a base for double-digit revenue CAGR during FY 22-23. Ramp-up in the Daimler deal, expected in Q2 FY22, could add an incremental 3% to the FY22 growth rate. Furthermore, as CLSA now expects FY22/FY23 EBIT margin at the upper end of the 23-24% band, CLSA increased their FY22/FY23 EPS estimates 4/5%. CLSA’s new Rs 1620 target price for Infosys is based on 27.5x 12-month forward EPS.
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