Infosys (INFO IN) Strong performance; small miss on margins maintain BUY

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1 INSTITUTIONAL EQUITY RESEARCH Infosys (INFO IN) Strong performance; small miss on margins maintain BUY INDIA IT SERVICES Quarterly Update 11 January 2019 Infosys reported mix set of numbers this quarter strong revenue growth but margins slightly below expectations. Digital business (31.5% of revenue) reported strong 3 CC yoy growth. The dealflow, too, remained decent at $1.6bn (+101% yoy). Most importantly, attrition showed a significant improvement. Margins of 22.6%, lowest in last 15 years, was the only dampener which too, were impacted by non-recurring depreciation charges. This performance and the dealflow momentum, places the company on the perfect pedestal to report strong revenue growth in coming quarters. Overall, we remain positive on Infosys, on the back of improving business metrics and the significant valuation gap versus TCS (which, admittedly, continues to outperform it). Maintain BUY. Key takeaways from Q3FY19 CC growth at +2.7% qoq (+10.1% yoy) above expectations of +1. qoq CC. USD revenue grew +2.2% qoq (+8.5% yoy) ahead of estimates of +1% qoq. Geographies: US +2.6% qoq, Europe +3.8%, RoW +0.8%. India +5.2% (all in CC qoq). Verticals: BFSI +3.6% qoq, E&U +7., Manufacturing +7.6%, Hi-Tech +0.6% while Retail -0.1%, Communication -0.5% qoq (all numbers in CC qoq). EBIT margins at 22.6%, -110bps qoq (-170bps yoy) below estimates of 23.6%. The margins were impacted by lower utilization & onsite (-80bps qoq), higher compensation (-30bps), sales investments (-30bps), acquisition investments (-20bps), additional amortization on Panaya and Skava (-40bps) partly offset by INR depreciation (+50bps) and lower lease rentals (+40bps). PAT at Rs36bn (-12.2% qoq, -2. yoy) below estimates of Rs 41.5bn, due to further provision on Panaya and Skava (Rs 4.5bn). Adjusted PAT, slightly below estimates. Attrition at 19.9% (22.2% in Q2). Utilization at 83.8% (85.6% in Q2). Digital business at 31.5% of revenue grew +3 CC yoy. TCV of US$1.6bn (last quarter: $2bn). Capital Allocation: (1) Buyback amounting to Rs 82.6bn via open market route, at a price less than Rs 800/share. (2) Special Dividend of Rs 4/share, amounting to Rs 21bn. The management increased its FY19 CC revenue growth guidance to 8.5-9% (6-8% earlier) given the beat in this quarter. It will need to report 1- qoq growth to achieve this. EBIT margin guidance maintained at Management comments/concall takeaways: The company won 14 large deals across geographies (US: 7, Europe: 3, RoW: 4) and verticals (BFSI: 4, Manu: 4, Communication: 2, Retail, Lifescience, E&U: 1 each). Q4 margins to be impacted by INR appreciation, variable pay and investments. Outlook and valuation: Assuming Infosys achieves higher end of its guidance, it will report CC organic growth of 9%in FY19 lower than TCS, by ~200bps (assuming 11% growth for TCS). But it will report better organic growth than HCLT, Wipro and TechM making it a credible No. 2 player in the large-cap space. We continue to remain positive on the stock. We have made minor changes to our FY19/20 estimates (less than 2%) due to provisions for Panaya (FY19) and lower margin assumption (FY20). We introduce FY21 estimates and roll forward our valuation to FY21 earnings. We value the stock at 18x FY21 P/E (earlier 18x FY20 P/E). Our price target of Rs 800 (Rs 750 earlier). Maintain BUY. Rs mn Q3FY19 Q3FY18 yoy growth % Page 1 PHILLIPCAPITAL INDIA RESEARCH Q2FY19 qoq growth % vs. expectations % Comments BUY (Maintain) CMP RS 683 TARGET RS 800 (+17%) COMPANY DATA O/S SHARES (MN) : 4369 MARKET CAP (RSBN) : 2970 MARKET CAP (USDBN) : WK HI/LO (RS) : 755 / 513 LIQUIDITY 3M (USDMN) : 85.9 PAR VALUE (RS) : 5 SHARE HOLDING PATTERN, % Dec 18 Sep 18 Jun 18 PROMOTERS : FII / NRI : FI / MF : NON PRO : PUBLIC & OTHERS : KEY FINANCIALS Rs mn FY19E FY20E FY21E Net Sales EBIT Net Profit EPS, Rs PER, x EV/EBIT, x ROE, % CHANGE IN ESTIMATES Revised Est. % Revision Rs bn FY19E FY20E FY19E FY20E Revenue ($mn) 11,812 12, % -1.0% EBIT % -2.8% Core PAT % -2.1% EPS (Rs) % -2.1% Vibhor Singhal ( ) vsinghal@phillipcapital.in Shyamal Dhruve ( ) sdhruve@phillipcapital.in US$ revenues (mn) 2,987 2, , % Growth above estimates Net sales 214, , , % EBIT 48,300 43, , % Margins (%) 22.6% bps 23.7% -120bps -100bps Lower margins due to investments, provisions Profit after tax 36,100 36, , % EPS (Rs) % TCV (US$ mn) 8.5-9% 6-8% Guidance increased Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. ( PHILLIPCAP ) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

2 Quarterly performance Rs mn US$ revenues 2,755 2,805 2,831 2,921 2,987 QoQ growth % 1.0% 1.8% 0.9% 3.2% 2. Net sales 177, , , , ,000 QoQ growth % % 5.8% 7.7% 3.8% YoY growth % 6% 12% 17% 20% Cost of revenues 109, , , , ,360 SGA & other exp 20,250 20,570 23,030 24,340 25,540 EBITDA 48,170 49,300 49,730 53,570 54,100 QoQ growth % % 7.7% 1.0% YoY growth % 1% 6% 9% 1 12% Margins (%) 27.1% % 26.0% 25. Depreciation 4,980 4,580 4,360 4,630 5,800 EBIT 43,190 44,720 45,370 48,940 48,300 Margins (%) % 23.7% 23.7% 22.6% Other income incl FX 9,620 5,340 7,260 7,390 7,530 Forex income/(loss) Pre-tax profit 52,810 50,060 49,930 56,330 51,320 Tax provided 15,840 13,160 13,810 15,230 15,220 Reported Profit after tax 36,970 36,900 36,120 41,100 36,100 QoQ growth % -0.8% -0.2% -2.1% 13.8% -12.2% YoY growth % 0% 2% 10% -2% Margins (%) 20.8% % 19.9% 16.9% EPS, Rs Source: Company, PhillipCapital India Research Quarterly operating metrics QoQ growth Verticals Financials Services 0.1% 0.9% -1.2% 4.5% 3.2% Retail % % Communications 1.0% 5.9% -0.6% -0.1% -1.1% Energy, Utilities, Resources & Services 3.6% 1.8% Manufacturing 3.1% 1.8% 0.9% 3.2% 7.6% Hi Tech 1.0% 4.6% 0.9% 4.6% -0.5% Life Sciences -2.0% % 0.1% -0.9% Others -5.0% -7.7% 0.9% 3.2% -1. Geography North America 0.7% 0.1% 1.9% 3.7% 2. Europe 6.2% 3.5% -1.1% 1.9% 3.1% India -8.2% -5.0% % 6. RoW -4.5% 8.5% 1.7% 4.0% -0.8% Source: Company, PhillipCapital India Research Estimates Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 ,116 2,029 1,570 USD revenue and qoq growth INR revenue and qoq growth 3,200 Revenue, US$ mn (LHS) US$ Revenue Growth, % (RHS) 6% 220 Revenue, Rs bn (LHS) INR Revenue Growth, % (RHS) 12% 3, , % 2,600 2,400 2,200 0% % 2, Source: Company, PhillipCapital India Research TCV ($ mn) Top client revenues 2,500 TCV ($mn) 120 Revenue, US$ mn (LHS) Contribution, % (RHS) 2, ,500 1, Source: Company, PhillipCapital India Research Page 3 PHILLIPCAPITAL INDIA RESEARCH

4 Financials Income Statement Y/E Mar, Rs mn FY18 FY19E FY20E FY21E Net sales 705, , , ,461 Growth, % Employee expenses -432, , , ,463 Other Operating expenses -82,430-98, , ,458 EBITDA (Core) 190, , , ,540 Growth, % Margin, % Depreciation -18,620-19,897-20,969-20,858 EBIT 171, , , ,682 Growth, % Margin, % Forex gains/losses 2,260 1, Other Non-Operating Income 29,670 26,561 28,744 30,036 Pre-tax profit 202, , , ,718 Tax provided -56,740-58,952-64,091-69,355 Profit after tax 145, , , ,362 Others (Minorities, Associates) Net Profit 145, , , ,362 Growth, % Net Profit (adjusted) 146, , , ,362 Wtd avg shares (m) 4,350 4,350 4,350 4,350 FY18 FY19E FY20E FY21E US$ Revenue ($ mn) 10,939 11,812 12,822 13,978 Growth, % Re / US$ (rate) Balance Sheet Y/E Mar, Rs mn FY18 FY19E FY20E FY21E Cash & bank 198, , , ,028 Marketable securities at cost Debtors 131, , , ,289 Inventory Loans & advances 188, , , ,151 Total current assets 518, , , ,468 Investments 121, , , ,720 Net fixed assets 146, , , ,287 Non-current assets Total assets 798, , ,656 1,036,655 Total current liabilities 149, , , ,591 Non-current liabilities Total liabilities 149, , , ,591 Paid-up capital 10,880 21,760 21,760 21,760 Reserves & surplus 638, , , ,304 Minorities Shareholders equity 649, , , ,064 Total equity & liabilities 798, , ,656 1,036,655 Cash Flow Y/E Mar, Rs mn FY18 FY19E FY20E FY21E Pre-tax profit 202, , , ,718 Depreciation 18,620 19,897 20,969 20,858 Chg in working capital -40,780 37,793-35,175-16,027 Total tax paid -64,160-58,312-64,091-69,355 Other operating activities Cash flow from operating activities 117, , , ,193 Capital expenditure -3,190-49,000-20,000-20,000 Chg in investments 45,280-25,930-40,000-40,000 Chg in marketable securities Other investing activities Cash flow from investing activities 42,090-74,930-60,000-60,000 Free cash flow 159, , , ,193 Equity raised/(repaid) -129,995 10, Debt raised/(repaid) Dividend (incl. tax) -112, ,790-99,162-99,162 Other financing activities 55,062-72, Cash flow from financing activities -187, ,653-99,162-99,162 Net chg in cash -28,070-25,575 4,392 38,031 Valuation Ratios FY18 FY19E FY20E FY21E Per Share data EPS (INR) Growth, % Book NAV/share (INR) CFPS (INR) DPS (INR) Return ratios Return on assets (%) Return on equity (%) Return on capital employed (%) Turnover ratios Asset turnover (x) Sales/Total assets (x) Sales/Net FA (x) Working capital/sales (x) Receivable days Liquidity ratios Current ratio (x) Quick ratio (x) Dividend cover (x) Net debt/equity (%) (49.3) (50.0) (50.7) (54.5) Valuation PER (x) PEG (x) - y-o-y growth Price/Book (x) Yield (%) EV/Net sales (x) EV/EBITDA (x) EV/EBIT (x) Source: Company, PhillipCapital India Research Estimates Page 4 PHILLIPCAPITAL INDIA RESEARCH

5 Stock Price, Price Target and Rating History B (TP 730) B (TP 760) B (TP 760) 600 B (TP 690) B (TP 650) B (TP 740) B (TP 665) B (TP 635) B (TP 565) B (TP 530) B (TP 530) B (TP 530) B (TP 530) B (TP 590) 400 M-16 J-16 B (TP O-16 N-16 D-16 F-17 M-17 M-17 J-17 A-17 S-17 N-17 D-17 J-18 M-18 A-18 J-18 J-18 S-18 O-18 D ) Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15% SELL <= -15% Target price is less than or equal to -15%. Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd. This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance. This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice. Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request. Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report. Page 5 PHILLIPCAPITAL INDIA RESEARCH

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