Strong order inflow, improved guidance: Infosys investors have lot to cheer

At 17 times its FY21 earnings, firm is trading at 26% discount to rival TCS

Infosys investors have multiple reasons to be happy about. A decent December quarter (Q3) performance, strong order inflows, improved guidance and more importantly clean chit for the management on whistlebower complaint are positives going ahead.

Its performance in Q3 was broadly similar to what analysts had estimated with reported revenue and net profit growth higher by two per cent and 10.6 per cent sequentially. Even in constant currency (CC) terms, Infosys’ sequential revenue growth of 1 per cent in Q3, was at par with the analysts’ expectations of 0.9-2 per cent. However, EBIT margin of 21.9 per cent marginally missed street estimates of 22.3 per cent.

As expected, the financial services vertical (31-32 per cent of revenues) grew at a moderate pace in Q3. But, better growth by other verticals such as retail, communication, life science, hi-tech, among others, helped Infosys. Digital business rose by a sharp 40.8 per cent, year-on-year in CC terms. As per the management, continued softness in European banking space hurt its financial services segment and the pressure would continue for some more quarters and retail segment would remain volatile.

Despite the pressures in key verticals, Infosys revised its FY20 CC revenue growth guidance to 10-10.5 per cent from 9-10 per cent. Though it was also expected by analysts, the increase in revenue guidance was for the third consecutive time amidst sluggish outlook for the entire sector. Better growth estimates for other verticals, strong digital business and large deal pipeline are expected to boost revenue growth. Infosys in Q3 bagged large deals to the tune of $1.8 billion taking the total to $7.36 billion so far in FY20, up 56 per cent higher year-on-year.

Lastly, clean chit by the audit committee on the whistleblower issue would further support the stock, though decision from regulators such as Security and Exchange Commission (SEC) of the US is still pending.

Given these positives, the ADRs listed at the Frankfurt Stock Exchange were up 7.5 per cent in trade. Amit Chandra, analyst at HDFC Securities believes that a strong deal pipeline, healthy growth in digital business, lower attrition and positive audit report on the whistleblower issue should help improve valuations. This could also narrow the valuation gap between Infosys and TCS, he adds. At 17 times FY21 estimated earnings, Infosys is currently trading at a 26 per cent discount to TCS.