Stock Analysis | Infosys Ltd. (NSE:INFY): Q3FY23 Results Out; Total Income rises 21% YoY

Infosys Ltd.(NSE:INFY) , one of the largest IT companies in India, and its digital and traditional IT services. The company offers a wide range of services, including artificial intelligence (AI)-based analytics, big data, IoT, API, microservices, modernisation of legacy technology systems, migration to cloud applications, and implementation of advanced cyber security systems. As of December 31, 2022, Infosys had 1,850 active clients and a presence in 50 countries. The company has a strong record of deal wins and robust financials, as well as liquidity and an expectation of inorganic growth, which could bring better earnings visibility in the medium to long term. However, economic challenges in the US and Europe could impact client’s IT spending in the near term, and some clients have shown a cautious approach to their IT spending. Therefore, Infosys may be cautious in providing revenue guidance for FY24.

Infosys has aggressively invested in digital technologies and has strong relationships with clients and robust execution capabilities. The company is well-positioned to quantify the opportunities of transformation by clients. Margins stability, as well as expansion led by operational efficiencies, has been a focus for the company. Despite the challenges, Infosys is well-positioned to take advantage of digital transformation opportunities. The company’s profitability remains among the best in the industry, supported by its superior revenue mix, cost optimization measures, and delivery effectiveness. The company’s growth leadership is due to investments in multiple dimensions of business, including digital competencies, large deal advisory channel, sales & marketing, localization, digital capabilities, and enhancing presence in BPO.

Post-pandemic, clients have been investing in revamping their infrastructure, including front-end, back-end, cloud, digital adoption, and transformation. The increased demand in data and analytics, cloud, security, legacy modernization, and IoT is expected to continue driving growth in the digital space. Infosys is well-positioned to capture opportunities from increasing spends on multi-year core modernization, higher adoption of digital transformation initiatives, and increasing outsourcing to drive efficiency and greater productivity.

The company had another strong quarter with broad-based growth across verticals and geographies. The company’s large deal wins in the quarter were robust, and the strongest in the last 8 quarters at $3.3 billion. Infosys also raised its FY23 revenue guidance to 16-16.5% from 15-16% earlier. The operating margin guidance retained at 21-22% for FY23E. In terms of revenue, the company’s consolidated revenue grew by 4.9% QoQ and 20.2% YoY to Rs 38,318 crore in Rupee terms, driven by broad-based growth in segments and geographies. Revenue in USD terms was up by 2.3% QoQ and 9.6% YoY to US$ 4,659 million. The revenue growth in constant currency was at 2.4% QoQ and 13.7% YoY. The company’s EBIT increased 14.9% QoQ and 20.8% YoY to Rs 9042 crore, and EBIT margin surged by 210bps QoQ and inched up by 10bps YoY to 23.5% in Q3FY23. Net profit grew by 9.4% QoQ and 13.1% YoY to Rs 6,586 crore, supported by strong demand-led revenue growth, and the net profit margin increased by 70bps QoQ, although it was down by 110bps YoY to 17.2% in Q3FY23.

On geography mix, North America contributed 62%, Europe contributed 25.8%, Rest of World 9.8%, and India contributed 2.4% in Q3FY23. While, North America contributed 62.5%, Europe contributed 24.7%, Rest of World 9.9%, and India contributed 2.9% in Q2FY23. On business segment, financial services contributed 29.3%, Retail 14.3%, Communication 12.3%, Energy & Utilities 13%, Manufacturing 13.3%, Hi Tech 8.1%, Life Science 7%, and others contributed 2.7% in Q3FY23. While, financial services contributed 30.5%, Retail 14.2%, Communication 12.3%, Energy & Utilities 12.3%, Manufacturing 12.8%, Hi Tech 8.2%, Life Science 6.7%, and others contributed 3% in Q2FY23. Digital revenue increased to 62.9% in Q3FY23 vs. 61.8% in Q2FY23, and 61% in Q1FY23, while Core revenue stood at 37.1% in Q3FY23 vs. 38.2% in Q2FY23, 39% in Q1FY23. Infosys had 346,845 employees as of Dec 31, 2022, compared to 345,218 employees as of Sept 30, 2022. Trailing 12 months attrition stood at 24.3% in Q3FY23 vs. 27.1% in Q2FY23, 28.4% in Q1FY23, 27.7% in Q4FY22, 25.5% in Q3FY22, 20.1% in Q2FY22, and 13.9% in Q1FY22. Staff utilization excluding trainees was at 81.6% in the quarter, impacted by furlough, compared to 83.

Infosys’ EBIT margin surged in Q3FY23 supported by strong demand-led revenue growth, and the company is confident of achieving operating margin guidance despite wage hikes, higher attrition, and more hiring. The company has given margin guidance at 21-22% for FY23E. The company could achieve the margin target of 21-22% in FY23E by taking into consideration many levers like cost rationalization, offshoring, pyramid rationalization, rupee depreciation, pricing, and automation.

Infosys has a strong fundamentals supported by a healthy liquidity position, zero debt, and high dividend payout. The company’s financial profile has been robust in the past, with a debt-free balance sheet and a healthy cash generating ability. Financial flexibility is strong, supported by robust liquidity. However, Infosys expressed weakness in Mortgage, Investment banking, Telco, Hi-tech, and Retail verticals, and clients are looking at cost optimization rather than digital transformation programs. Despite this, the company continued to win large deals, and Energy & Utility (E&U) growth ramped up. The company expects strong traction in areas of Engineering, IoT supply chain, and Cloud migration. The company has raised its FY23E constant currency revenue growth forecast to 16-16.5% from 15-16% earlier and operating margin for FY23E to be in the range of 21-22%. This indicates the company’s positive outlook for the future.

Moreover, Infosys has started a share buyback program through the open market route from December 7, 2022, and till date (Feb 02, 2023), the company has bought back 5.484 crore shares worth Rs 8,651 crore of total authorization of Rs 9,300 crore at an average price of approx. Rs 1,577.49 per share (compared to the maximum Buyback Price of Rs 1,850 per share). Its cash and cash equivalent stood at Rs 32,800 crore as on Sept 30, 2021, and the free cash conversion was strong at 109.5% of net profit. This indicates the company’s strong liquidity position, which can support future growth initiatives, including niche acquisitions.

Infosys is also expected to invest in niche acquisitions to strengthen its domain expertise in the medium term. These will be largely funded from its cash surplus and healthy accruals. The company has always been generous in declaring dividends and engaging share buybacks. The company has declared an interim dividend of Rs. 16.5/share for FY23E, indicating its commitment to rewarding shareholders.

There are several key concerns that could impact Infosys going forward. One such concern is the potential appreciation of the Indian rupee against the USD, which could impact the company’s profitability as it generates a significant portion of its revenue in USD. Additionally, pricing pressure could impact Infosys, as clients may look to cut costs, including IT spending, in the face of economic headwinds. Another key concern is the retention of skilled headcount, particularly in the face of strict immigration norms and rising visa costs. These factors could impact the company’s ability to attract and retain talented employees, which could in turn impact the quality of its services and its ability to meet client demand. Furthermore, the industry as a whole is facing a talent constraint, which has led to an unsustainable increase in utilization rates and the use of subcontractors. These factors could lead to a decline in EBIT margins for Infosys and its peers, as costs associated with these practices increase. Finally, Infosys attrition rates are higher compared to its peers, which could impact the company’s ability to deliver high-quality services to its clients. However, the company has taken steps to address this issue, including announcing compensation hikes, promotions, and career development initiatives to increase employee engagement and control attrition.

Infosys seems to have a strong financial profile with healthy liquidity, zero debt, and high dividend payout. The company’s financial flexibility is also supported by robust liquidity. Infosys has expressed weakness in certain verticals and clients are looking at cost optimization rather than digital transformation programs. However, the company has continued to win large deals and expects strong traction in areas of engineering, IoT supply chain, and cloud migration. Infosys has also started a share buyback program and has a cash surplus to fund niche acquisitions. While there are concerns about Indian rupee appreciation, pricing pressure, retention of skilled headcount, and rising visa costs, Infosys has a strong deal pipeline and positive demand environment which could bring better earnings visibility going forward. The company has raised its FY23E constant currency revenue growth forecast and expects revenue generation opportunities from clients’ spending on new edge technologies. Investments made by Infosys in digital transformation, analytics, cloud, cyber security, and AI are expected to serve emerging demands of clients in these areas going forward. Infosys is also actively looking for acquisitions, especially in digital areas like cloud and data science in new geographies. Overall, Infosys seems to be well-positioned for growth in the future.