Infosys exceeds expectations in Q3. How may the stock react to quarterly prints

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The IT giant posted a consolidated net profit of 6,586 in Q3FY23 rising by 13.4% YoY and 9.4% QoQ. Meanwhile, revenue from operations came in at 38,318 crore in Q3FY23 increasing by 20.2% YoY and 4.9% QoQ.

Further, the company’s attrition rate of IT services dropped to 24.3% in Q3FY23 from 27.1% in Q2FY23. While the company made a net addition of 1,627 employees quarter-on-quarter — taking the total headcount to 3,46,845 in December 2022 quarter.

Infosys said, strong Q3 performance with year-on-year growth at 13.7% and sequential growth at 2.4% in constant currency. Year-on-year growth was in double digits for most business segments and geographical regions in constant currency terms. Large deal TCV for the quarter was the strongest in the last 8 quarters at $3.3 billion. Digital comprised 62.9% of overall revenues and grew at 21.7% in constant currency. The operating margin for the quarter remained resilient at 21.5%.

In its first cut note, Emkay said, revenue growth exceeded expectations, while FY23 revenue growth guidance was raised to 16-16.5% implying a muted Q4.

Infosys has retained its operating margin guidance at 21%-22% for FY23.

Emkay’s note added, “Infosys reported revenues of $4.66 billion up 2.3%/9.6% QoQ/YoY (CC 2.4%/13.7% QoQ/YoY), above our expectations of $4.59 billion (TCS Q3FY23 revenues was $7.07 billion 2.2% CC QoQ). EBITM was flat sequentially at 21.5%, 20 bps below our expectations. (TCS IT services EBITM grew ~50 bps QoQ at 24.5%). Adjusted profits at Rs65.9 billion (9.4% QoQ, 13.4% YoY), above our expectations of Rs63.7bn due to higher other income.”

On FY23 revised guidance, Emkay’s note added, “Infosys raised its revenue growth guidance to 16-16.5% CC (earlier 15-16% CC), implying -1.1% to 0.5% QoQ growth in Q4, and retained its EBITM guidance to 21-22%.”

Among other growth verticals in constant currency terms, the company posted 5.5% YoY growth in financial services, 36.8% YoY growth in manufacturing, 12.7% YoY growth in retail, 25.9% YoY in ECS, 12.7% YoY rise in communications, 10.4% upside in hi-tech, and 5% YoY surge in life sciences.

On geographical performance, Infosys recorded 10.5% YoY growth in the US, while the growth was higher at 25.3% and 11.9% year-on-year in Europe and the Rest of the World (ROW). However, in India, the growth dropped 5.4% YoY in constant currency.

Emkay expects Infosys stock to react ‘Neutral to positive’ after Q3 results. Among key positives are — revenue beat, large deal intake of USD3.3bn, FY23 revenue growth guidance increased to 16-16.5% CC, and LTM attrition moderated by 280bps QoQ.

Also, Mitul Shah – Head of Research at Reliance Securities said, “Infosys reported a healthy performance in 3QFY23 with revenues 0.7% above our estimates in a seasonally weak quarter. However, EBIT margin came in at 21.5%, 30bps below our estimate of 21.8% while its PAT is above our estimate by 2.5%, supported by lower tax rate and healthy other income.”

Notably, Reliance Securities expert had maintained a ‘Buy’ recommendation on Infosys shares.

Shah said, “Infosys reported a healthy 3QFY23 performance. Margins were slightly below our expectations. Moreover, management raised its FY23 revenue growth guidance range from 15-16% to now 16-16.5%, and maintained its EBIT margin guidance to 21-22%, indicating better performance during the balance of FY23. Considering the industry-leading double-digit revenue growth, rising share of digital business (~63% of revenue), likely improvement in EBIT margin levels from current levels, declining attrition rate, and record high new TCV, we maintain our BUY recommendation on the stock.”

Moreover, Manish Chowdhury – Head of Research at Stoxbox believes there is limited downside risk in Infosys going ahead.

According to Chowdhury, Infosys Ltd.’s operating margins in Q3FY23 remained resilient due to cost optimization benefits which have offset the impact of seasonal weakness in operating parameters. Attrition also reduced meaningfully during this quarter and is expected to decline further in the near term which is positive for the company. Despite the ongoing global turmoil, Infosys was able to withstand on most of the parameters along with an upward revision to the revenue guidance for FY23.

“We feel that the performance of the company would continue to remain resilient due to strong traction in its digital segment and continued focus on operational efficiencies. The valuation still looks attractive compared to historical averages and we believe that there is limited downside risks going forward,” Chowdhury added.

On BSE, Infosys shares closed at 1,480.55 apiece up by 9.10 or 0.62% on Thursday. The stock was near the day’s high of 1,485 apiece. Infosys is the fourth largest Indian company in terms of market share, while the second largest IT firm after TCS. Its market cap as of January 12, 2023, stood over 6.23 lakh crore.

 

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.


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