Q3FY19 RESULT UPDATE RETAIL EQUITY RESEARCH Infosys Ltd IT BSE CODE: 500209 NSE CODE: INFY Bloomberg CODE: INFO:IN SENSEX: 36,445 HOLD Rating as per Largecap 12months investment period CMP Rs. 744 TARGET Rs. 802 RETURN 8% 23 rd January 2019 Mixed performance; deal momentum continues Infosys is India s second largest IT company. It provides services across various verticals such as Financial Services (FS), Manufacturing (MFG), Energy & Utilities, Communication & Services (ECS), Retail, Consumer packaged goods & Logistics (RCL) and Life Sciences & Healthcare (HILIFE). Continued growth momentum in BFSI, energy & utilities and manufacturing segments resulted in strong revenue growth of 2.7% QoQ in CC terms (2.2% in USD terms) in Q3FY19. EBIT margin came below expectation at 22.6% down by 118 bps QoQ impacted by oneoffs, increased compensation & investments and lower utilisation. We have increased our revenue estimate for FY19/20, given beat in performance in Q3FY19, upgrade in revenue guidance, sustained investments in digital and strong deal wins. We build revenue CAGR of 13% over FY18-21E. However, due to miss in margin in Q3FY19 with continued investments and rupee appreciation, we tweak our EBIT margin estimate by 50/40bps for FY19E/20E. Hence, we maintain HOLD rating on the stock with a revised rollover TP of Rs. 802 based on P/E multiple of 18x FY21 EPS. Topline outpaces estimate Infosys posted solid performance in Q3FY19 with consolidated revenue growth at 2.7% QoQ in CC terms (2.2% in USD terms) in a seasonally weak quarter. The beat in performance was primarily driven by strong growth in financial services (3.6% QoQ in CC terms), energy and utilities (7.4%) and manufacturing (7.6%). Further growth across geographies also powered strong revenue growth. Geographically, the growth was led by North America (2.6% QoQ), Europe (3.8%) and India (5.2%). Blended volume growth stood strong during the quarter at 2.6% QoQ in CC terms. Further continued acceleration in digital business which grew strongly by 33.1% & 5% QoQ in CC terms with revenue contribution increasing to 31.5% in Q3FY19 as compared to 31% in Q2FY19 also aided growth. Margin weighed down by multiple headwinds & one-offs Despite strong revenue growth, EBIT margin came in below expectation at 22.6% down by 118 bps QoQ. However, after adjusting for one-off depreciation due to reclassification of Panaya and Skava assets from held for sale, EBIT margin was 23%. Despite EBIT margin was down by 70bps QoQ primarily impacted lower utilization (80 bps), increased compensation (30bps), increased investments in sales, re-skilling, localisation (30 bps), and acquisition of Fluido (20bps). This was partially offset by currency tailwind (+50bps) and lower leaves & other cost (+40bps). Net profit further declined by 1.2% QoQ led by higher depreciation. Management further expects margins in Q4FY19 to be impacted by rupee appreciation and continued investments, while maintaining the EBIT margin guidance of 22-24% for FY19. Resultantly, we tweak our EBIT margin estimate for FY19E/20E. However, we believe uptick in utilisation and stability in investments will aid in margin recovery from FY20 onwards. Traction in deal wins & increased guidance lends visibility on revenue growth momentum Given the outperformance in revenue growth in Q3FY19 coupled with healthy deal wins & deal pipeline, the management raised its revenue growth guidance for FY19 to 8.5-9% (CC terms) as against 6-8% earlier. This would led to continued revenue growth momentum in Q4FY19. Continuing its momentum of strong deal wins, Infosys bagged 14 large deals during the quarter with TCV of USD 1.57 bn of which 30% were from new wins, taking the total deal TCV to USD 4.7 bn in 9MFY19. Robust deal wins and strong pipeline provides strong revenue growth visibility for FY20E. Additionally, increasing traction in digital will also aid growth. Hence, we increase our revenue estimates for FY19/20 by 1% each and build revenue CAGR of 13% over FY18-21E. Outlook & Valuation: We tweak our earnings estimate for FY19E/20E by ~1% each to factor in lower margin assumption. However, acceleration in revenue growth & deal flow, sustained traction in growth in BFSI and digital exhibits strong revenue visibility going ahead. Besides, the large share buyback announced by the company worth Rs. 8,260 cr through the open market route at a maximum price of Rs. 800 per share will also support the stock price. Hence, we maintain HOLD rating on the stock with a revised rollover TP of Rs. 802 based on P/E multiple of 18x FY21 EPS. Company Data Market Cap (Rs. cr) 323,941 Enterprise Value (Rs. cr) 298,336 Outstanding Shares (cr) 435.2 Free Float 87% Dividend Yield 3.0% 52 week high Rs. 755 52 week low Rs. 546 6m average volume (cr) 0.9 Beta 0.8 Face value Rs. 5 Shareholding % Q1FY19 Q2FY19 Q3FY19 Promoters 12.9 12.8 12.8 FII s 34.9 35.0 34.5 MFs/Insti 40.1 39.8 40.1 Public 9.2 9.5 9.5 Others 2.9 2.9 3.1 Total 100.0 100.0 100.0 Price Performance 3mth 6mth 1 Year Absolute Return 15% 10% 27% Absolute Sensex 8% (1%) 1% Relative Return* 7% 11% 26% *over or under performance to benchmark index Consolidated (Rs.cr) FY19E FY20E FY21E Sales 82,986 92,101 1,01,324 Growth (%) 17.7 11.0 10.0 EBITDA 21,342 23,962 26,463 Margin (%) 25.7 26.0 26.1 PAT Adj 15,849 17,578 19,392 Growth (%) -1.1 10.9 10.3 Adj.EPS 36.4 40.4 44.6 Growth (%) -1.1 10.9 10.3 P/E 20.4 18.4 16.7 P/B 4.7 4.4 4.1 EV/EBITDA 14.0 12.4 11.1 RoE (%) 23.7 24.7 25.5 D/E - - -
Quarterly Financials (Consolidated) Profit & Loss Account (Rs cr) Q3FY19 Q3FY18 Q2FY19 QoQ 9MFY19 9MFY18 Sales 21,400 17,794 20.3 20,609 3.8 61,137 52,439 16.6 EBITDA 5,410 4,817 12.3 5,357 1.0 15,740 14,080 11.8 Margin (%) 25.3 27.1 (179bps) 26.0 (71bps) 25.7 26.9 (110bps) Depreciation 580 498 16.5 463 25.3 1,479 1,404 5.3 EBIT 4,830 4,319 11.8 4,894 (1.3) 14,261 12,676 12.5 Interest - - - - - - - - Other Income 753 962 (21.7) 739 1.9 1,948 2,659 (26.7) Exceptional Items 451 - - - - 451 (71) - PBT 6,034 5,281 14.3 5,633 7.1 16,660 15,264 9.1 Tax 1,522 152 901.3 1,523 (0.1) 4,426 2,926 51.3 PAT 4,512 5,129 (12.0) 4,110 9.8 12,234 12,338 (0.8) Minority Interest/ PL from associates (1) - - - - (2) - - Reported PAT 4,511 5,129 (12.0) 4,110 9.8 12,232 12,338 (0.9) Adjustment (451) - - - - (451) 71 - Adj PAT 4,060 5,129 (20.8) 4,110 (1.2) 11,781 12,409 (5.1) No. of shares (cr) 435.2 217.6 100.0 435.2-435.2 228.8 90.2 EPS (Rs) 9.3 11.8 (20.8) 9.4 (1.2) 27.1 28.5 (5.1) Segmental Revenue (Rs cr) Q3FY19 Q3FY18 Q2FY19 QoQ 9MFY19 9MFY18 Financial Services (FS) 6,953 4,643 49.8 6,644 4.7 19,672 13,955 41.0 Manufacturing (MFG) 2,166 1,955 10.8 1,989 8.9 5,992 5,734 4.5 Energy, utilities, commu. (ECS) 5,288 4,241 24.7 5,056 4.6 15,147 12,320 22.9 Retail, consumer goods (RCL) 3,503 2,837 23.5 3,469 1.0 10,141 8,274 22.6 Life sciences, Healthcare (HILIFE) 1,335 2,375 (43.8) 1,321 1.1 3,916 6,846 (42.8) Hi-Tech 1,569 1,256 24.9 1,537 2.1 4,528 3,745 20.9 All other segment 586 487 20.3 593 (1.2) 1,741 1,565 11.2 Total 21,400 17,794 20.3 20,609 3.8 61,137 52,439 16.6 Less: Intersegment revenue - - - - - - - - Net Revenue from operations 21,400 17,794 20.3 20,609 3.8 61,137 52,439 16.6 Source: Company, Geojit Research Change in estimates Old estimates New estimates Change % Year / Rs cr FY19E FY20E FY19E FY20E FY18E FY19E Revenue 82,577 91,198 82,986 92,101 1 1 EBITDA 21,642 24,083 21,342 23,962 (1) (1) Margins (%) 26.2 26.4 25.7 26.0 (50bps) (40bps) PAT 16,039 17,660 15,849 17,578 (1) (1) Adj. EPS 36.9 40.6 36.4 40.4 (1) (1)
Consolidated Financials Profit & Loss Account Balance Sheet Sales 68,484 70,522 82,986 92,101 101,324 % change 9.7% 3.0% 17.7% 11.0% 10.0% EBITDA 18,604 19,011 21,342 23,962 26,463 % change 8.9% 2.2% 12.3% 12.3% 10.4% Depreciation 1,703 1,863 1,995 2,247 2,499 EBIT 16,901 17,148 19,346 21,715 23,964 Interest - - - - - Other Income 3,080 3,193 2,666 2,700 2,970 PBT 19,981 20,341 22,012 24,414 26,934 % change 6.6% 1.8% 8.2% 10.9% 10.3% Tax 5,598 4,241 6,163 6,836 7,541 Tax Rate (%) 28.0% 20.8% 28.0% 28.0% 28.0% PAT 14,383 16,100 15,849 17,578 19,392 MI/P&L from (30) (71) - - - asso/ex.ordi Reported PAT 14,353 16,029 15,398 17,578 19,392 Adj* - - 451 - - Adj PAT 14,353 16,029 15,849 17,578 19,392 % change 6.4% 11.7% -1.1% 10.9% 10.3% No. of shares (cr) 228.8 217.6 435.2 435.2 435.2 Adj EPS (Rs) 33.0 36.8 36.4 40.4 44.6 % change 6.4% 11.7% -1.1% 10.9% 10.3% DPS (Rs) 13.5 21.8 22.5 25.0 27.5 Cash 22,625 19,818 17,198 17,160 17,801 Accounts Receivable 12,322 13,142 15,465 17,163 18,882 Inventories - - - - - Other Cur. Assets 8,788 8,590 9,467 10,417 11,459 Investments 16,423 12,163 14,163 16,163 18,163 Gross Fixed Assets 18,332 20,769 23,569 26,369 29,169 Net Fixed Assets 9,751 10,363 11,168 11,721 12,021 CWIP 1,365 1,606 1,606 1,606 1,606 Intangible Assets 3,652 2,211 3,586 3,586 3,586 Def. Tax (Net) 333 741 741 741 741 Other Assets 7,889 10,715 10,715 10,715 10,715 Total Assets 83,148 79,349 84,108 89,271 94,974 Current Liabilities 14,013 13,781 14,442 15,083 15,754 Provisions - - - - - Debt Funds - - - - - Other Liabilities 153 644 644 644 644 Equity Capital 1,144 1,088 2,176 2,176 2,176 Reserves and Surplus 67,838 63,835 66,845 71,367 76,398 Shareholder s Fund 68,982 64,923 69,021 73,543 78,574 Minority Interest - 1 1 1 1 Total Liabilities 83,148 79,349 84,108 89,271 94,974 BVPS (Rs) 317.0 149.2 158.6 169.0 180.5 Cash flow Pre-tax profit 14,353 16,029 22,012 24,414 26,934 Depreciation 1,703 1,863 1,995 2,247 2,499 Changes in W.C (2,156) 84 (2,539) (2,008) (2,089) Others 3,284 2,071 (2,666) (2,700) (2,970) Tax paid (5,653) (6,829) (6,163) (6,836) (7,541) C.F.O 11,531 13,218 12,640 15,118 16,833 Capital exp. (2,760) (1,998) (4,175) (2,800) (2,800) Change in inv. (390) - (2,000) (2,000) (2,000) Other invest.cf (11,392) 6,450 2,666 2,700 2,970 C.F - investing (14,542) 4,452 (3,509) (2,100) (1,830) Issue of equity - (13,041) - - - Issue/repay debt - - - - - Dividends paid (6,939) (7,464) (11,750) (13,056) (14,362) Other finance.cf - - - - - C.F - Financing (6,939) (20,505) (11,750) (13,056) (14,362) Chg. in cash (9,950) (2,835) (2,620) (38) 641 Closing cash 22,625 19,818 17,198 17,160 17,801 Ratios Y.E March FY17 FY18 FY19E FY20E FY21E Profitab. & Return EBITDA margin (%) 27.2 27.0 25.7 26.0 26.1 EBIT margin (%) 24.7 24.3 23.3 23.6 23.7 Net profit mgn.(%) 21.0 22.7 19.1 19.1 19.1 ROE (%) 22.0 23.9 23.7 24.7 25.5 ROCE (%) 30.6 30.4 32.9 34.2 35.4 W.C & Liquidity Receivables (days) 66 68 68 68 68 Inventory (days) 0 0 0 0 0 Payables (days) 3 5 5 5 5 Current ratio (x) 3.8 3.5 3.5 3.7 3.8 Quick ratio (x) 3.8 3.5 3.5 3.7 3.8 Turnover &Levg. Gross asset T.O (x) 4.0 3.6 3.7 3.7 3.6 Total asset T.O (x) 0.9 0.9 1.0 1.1 1.1 Adj. debt/equity (x) 0.0 0.0 0.0 0.0 0.0 Valuation ratios EV/Net Sales (x) 4.3 4.2 3.6 3.2 2.9 EV/EBITDA (x) 16.0 15.7 14.0 12.4 11.1 P/E (x) 11.9 20.2 20.4 18.4 16.7 P/BV (x) 2.3 5.0 4.7 4.4 4.1
Recommendation Summary (last 3 years) Dates Rating Target Source: Bloomberg, Geojit Research 10 April 2015 BUY 625 30 April 2015 BUY 600 18 August 2015 BUY 660 1 October 2015 BUY 665 11 January 2016 BUY 660 23 February 2016 BUY 650 11 May 2016 HOLD 653 18 July 2016 BUY 621 18 October 2016 BUY 576 23 January 2017 BUY 542 19 April 2017 HOLD 493 18 July2017 HOLD 508 2 November 2017 HOLD 504 18 January 2018 HOLD 602 18 April 2018 HOLD 608 25 July 2018 HOLD 702 25 October 2018 HOLD 708 23 January 2019 HOLD 802 Investment Rating Criteria Large Cap Stocks; Buy - Upside is above 10%. Hold - Upside is between 0% - 10%. Reduce - Downside is more than 0%. Neutral - Not Applicable. Mid Cap and Small Cap; Buy - Upside is above 15%. Accumulate - Upside is between 10% - 15%. Hold - Upside is between 0% - 10%. Reduce/Sell - Downside is more than 0%. Neutral - Not Applicable. To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating. For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being upgraded to BUY or downgraded to a HOLD, REDUCE or SELL. Neutral - The analyst has no investment opinion on the stock under review. Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are available hereunder. However, Geojit's research desk has reviewed this report for any untrue statement of material fact or any false or misleading information. General Disclosures and Disclaimers CERTIFICATION I, Abhijit Kumar Das, employee of Dion Global Solutions Limited (Dion) is engaged in preparation of this report and hereby certify that all the views expressed in this research report (report) reflect my personal views about any or all of the subject issuer or securities. Disclaimer This report has been prepared by Dion and the report & its contents are the exclusive property of the Dion and the client cannot tamper with the report or its contents in any manner and the said report, shall in no case, be further distributed to any third party for commercial use, with or without consideration. Geojit Financial Services Limited has outsourced the assignment of preparation of this report to Dion. Recipient shall not further distribute the report to a third party for a commercial consideration as this report is being furnished to the recipient solely for the purpose of information. Dion has taken steps to ensure that facts in this report are based on reliable information but cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this report. It is hereby confirmed that wherever Dion has employed a rating system in this report, the rating system has been clearly defined including the time horizon and benchmarks on which the rating is based. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this report is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. Dion has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. This report is not to be relied upon in substitution for the exercise of independent judgment. Opinions or estimates expressed are current opinions as of the original publication date appearing on this report and the information, including the opinions and estimates contained herein, are subject to change without notice. Dion is under no duty to update this report from time to time. Dion or its associates including employees engaged in preparation of this report and its directors do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of securities, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc.
The investments or services contained or referred to in this report may not be suitable for all equally and it is recommended that an independent investment advisor be consulted. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to individual circumstances or otherwise constitutes a personal recommendation of Dion. REGULATORY DISCLOSURES: Dion is engaged in the business of developing software solutions for the global financial services industry across the entire transaction lifecycle and interalia provides research and information services essential for business intelligence to global companies and financial institutions. Dion is listed on BSE Limited (BSE) and is also registered under the SEBI (Research Analyst) Regulations, 2014 (SEBI Regulations) as a Research Analyst vide Registration No. INH100002771. Dion s activities were neither suspended nor has it defaulted with requirements under the Listing Agreement and / or SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with the BSE in the last five years. Dion has not been debarred from doing business by BSE / SEBI or any other authority. In the context of the SEBI Regulations, we affirm that we are a SEBI registered Research Analyst and in the course of our business, we issue research reports /research analysis etc that are prepared by our Research Analysts. We also affirm and undertake that no disciplinary action has been taken against us or our Analysts in connection with our business activities. In compliance with the above mentioned SEBI Regulations, the following additional disclosures are also provided which may be considered by the reader before making an investment decision: 1. Disclosures regarding Ownership Dion confirms that: (i) It/its associates have no financial interest or any other material conflict in relation to the subject company (ies) covered herein at the time of publication of this report. (ii) It/its associates have no actual / beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. Further, the Research Analyst confirms that: (i) He, his associates and his relatives have no financial interest in the subject company (ies) covered herein, and they have no other material conflict in the subject company at the time of publication of this report. (ii) He, his associates and his relatives have no actual/beneficial ownership of 1% or more securities of the subject company (ies) covered herein at the end of the month immediately preceding the date of publication of this report. 2. Disclosures regarding Compensation: During the past 12 months, Dion or its Associates: (a) Have not managed or co-managed public offering of securities for the subject company (b) Have not received any compensation for investment banking or merchant banking or brokerage services from the subject company (c) Have received compensation for products or services other than investment banking or merchant banking or brokerage services from the subject (d) Have not received any compensation or other benefits from the subject company or third party in connection with this report. 3. Disclosure regarding the Research Analyst s connection with the subject company: It is affirmed that I, Abhijit Kumar Das employed as Research Analyst by Dion and engaged in the preparation of this report have not served as an officer, director or employee of the subject company 4. Disclosure regarding Market Making activity: Neither Dion /its Research Analysts have engaged in market making activities for the subject company. Copyright in this report vests exclusively with Dion. Please ensure that you have read the Risk Disclosure Documents for Capital Market and Derivatives Segments as prescribed by the Securities and Exchange Board of India before investing. Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom, Kochi-682024, Kerala, India. Phone: +91 484-2901000, Website: www.geojit.com. For investor queries: customercare@geojit.com, For grievances: grievances@geojit.com, For compliance officer: compliance@geojit.com. Corporate Identity Number: L67120KL1994PLC008403, SEBI Stock Broker Registration No INZ000104737, Research Entity SEBI Reg No: INH200000345, Investment Adviser SEBI Reg No: INA200002817, Portfolio Manager: INP000003203, Depository Participant: IN-DP-325-2017, ARN Regn.Nos:0098, IRDA Corporate Agent (Composite) No.: CA0226