India's second-largest IT services company Infosys beat street expectations reporting an 11 percent YoY rise in its consolidated net profit to ₹6,021 crore in the September 2022 quarter (Q2FY23). It posted a profit of ₹5,421 crore in the same period last year.
Meanwhile, its revenue from operations came in at ₹36,538 crore, up 23.4 percent YoY as compared to ₹29,602 crore reported in Q2FY22. Sequentially, revenue grew 6 percent while the net profit jumped 12.3 percent over the previous (June) quarter.
The company also announced that it will buy back shares worth ₹9,300 crore, in order to reward its shareholders. The company has set the maximum buyback price at ₹1,850, a premium of 30 percent over the last closing price. It also declared an interim dividend of ₹16.50 per share, up 10 percent over the FY22 interim dividend.
The company further informed that revenues in constant currency terms jumped 18.8 percent YoY and 4 percent QoQ. Its operating margin, however, declined 2.1 percent YoY to 21.5 percent, but it was still up 1.4 percent on a QoQ basis.
“Our strong large deal wins and steady all-round growth in Q2 reflect the deep relevance and differentiation of our digital and cloud solutions for clients as they navigate their business transformation”, said Salil Parekh, CEO and MD, Infosys post the earnings. The deal wins in Q2 were the highest in the last 7 quarters.
“While concerns around the economic outlook persist, our demand pipeline is strong as clients remain confident in our ability to deliver the value they seek, both on the growth and efficiency of their businesses,” he added.
Meanwhile, Nilanjan Roy, Chief Financial Officer, Infosys further stated that While supply-side challenges are gradually abating as reflected in the reducing attrition rates, they continue to exert pressure on their cost structure.
Stock price trend
Infosys shares jumped 5 percent to ₹1,490 in intra-day deals on Friday on the back of its strong results in the September quarter. Overall positive market sentiment pushed the other IT stocks up as well.
The Nifty IT index outperformed the benchmark, rising 3 percent against a 2 percent jump in benchmark Nifty. All stocks in the Nifty IT index were also in the green in today's deals. While Infosys rose the most on robust results, L&T Infotech added 4.5 percent.
HCL Tech, Persistent Systems, Tech Mahindra, and L&T Tech also rose over 3 percent each. Meanwhile, Wipro and TCS were up between 1-1.5 percent.
However, in the last 1 year, IT stocks have not fared well. Infosys has fallen 17 percent in this period versus a 21 percent fall in Nifty IT. On a YTD basis, Infosys is down 21 percent. The stock has advanced a little over 5 percent in October so far after 2 consecutive months of decline.
Brokerage views
Motilal Oswal: Buy
The brokerage has a buy call on the stock with a target price of ₹1,630, indicating a potential upside of 15 percent.
"Infosys posted a strong set of earnings in Q2FY23. Demand and the order book remain robust. Its strong FY23 growth guidance and high headcount addition provide further demand visibility," said the brokerage. It expects the IT major to deliver a margin at the lower side of its guidance band, with strong growth and reduced dependence on sub-contractors as attrition falls. It sees Infosys as a key beneficiary of an acceleration in IT spends.
The management said it is seeing weakness in parts of Retail, Hi-Tech, Financials (Mortgages), and Telecom as it has started seeing some deal-related slowdowns in these segments. Despite this, it updated its revenue growth guidance for FY23 to 15-16 percent YoY in CC terms (from 14-16 percent earlier), pointed out MOSL.
"We were positively surprised by Infosys' margin performance, as that was the key concern among investors, given the supply-related headwinds. While INFO has done exceptionally well in lowering sub-contractor cost, we see scope for further improvement in FY24," it said.
CLSA: Buy
Infosys’ reported 2Q23 revenue growth a slightly below our estimate but was more than offset with a larger margin beat, strong deal wins and an unexpected calibration of FY23 revenue growth and margin guidance, said the brokerage. Its results, like peers, underline the resilience of the service portfolio and adeptness of the cost structure of Indian IT services companies, added CLSA.
It raised FY23 and FY24 EPS by 1 percent each, also to build-in a likely buyback (by Q4FY23). Thus, while the specter of macro risk remains an overhang, CLSA believes a likely pause in downgrades & the proposed buyback could revive investor interest. It maintained its BUY rating and raise its price target from ₹1,750 to ₹1,800. Infosys is our preferred sector pick and a part of the CLSA India Focus portfolio said the brokerage.
Axis Securities: Buy
The brokerage has a buy call on the stock with a target price of ₹1,750, indicating an upside of 23 percent. Axis believes that Infosys is well-placed for encouraging growth from a long-term perspective given its multiple long-term contracts with the world’s leading brands. Though the company’s margins are likely to be under pressure in the short term primarily due to rising subcontracting costs, richer revenue visibility gives us confidence in its business growth moving forward, noted the brokerage. It recommends a BUY rating on the stock and assigns a 24x P/E multiple to its FY24E earnings of ₹73.4/share to arrive at a TP of ₹1,750/share, implying an upside of 23 percent from the CMP.
Reliance Research: Buy
The brokerage has a buy call on the stock with a target price of ₹1,735, indicating an upside of 22 percent. The brokerage said that it expects Infosys to continue to gain market share in technology adoption. It sees Infosys reporting superior revenue growth vs. the top 4 Indian IT peers, driven by a surge in large deals and acceleration in the digital revenue share. Also, stable management keeps Infosys in a better position to make bolder decisions and pursue aggressive market share gain. Considering strong deal wins, a rising share of digital business, likely margin improvement ahead and a consistent capital allocation policy, it maintains a BUY recommendation with a revised 1-Yr target price of ₹1,735 from ₹1,680 earlier.
Nirmal Bang: Sell
The brokerage has a sell call on the stock with a target price of ₹1,153, indicating a downside of 19 percent.
While Infosys’ Q2FY23 CC QoQ revenue growth at 4 percent was a tad softer than our 4.5 percent estimate, EBIT margin was a little ahead, noted Nirmal Bang. With macro concerns swirling, INFY has done well to reduce uncertainty by tightening the guidance range on both revenue and margins, it said.
The brokerage pointed out that INFY did not elaborate much on FY24, it stated that discretionary spending is being selectively cut. While FY23 consensus expectations will be stable after multiple quarters of cuts due to disappointing margins, Nirmal Bang believes there is a lot of divergence in views on FY24. It added that its estimates are at the lower end of the street estimates as we are assuming a low single-digit growth impact from both lower volume as well as some price compression. It also predicts tighter IT spending by customers due to a significantly weaker corporate revenue/profit picture amid a likely mild recession in 2023 in the US.
"Post 1QFY23, we have broadly maintained our operating numbers, but EPS numbers are marginally lower. Due to the buyback, ‘other income’ goes down in FY24 and beyond, countered partially by lower outstanding equity shares. We maintain our ‘SELL’ rating on INFY with a lowered target price (TP) of Rs1,153, valuing it at 17.9x on Sept‘24E EPS (10% discount to TCS target PE multiple)," said the brokerage.
