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Analysis: 5 big takeaways from Infosys Q1FY20 earnings

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India’s second-biggest software services company is betting on robust demand from customers for its new-age digital services such as cloud, data and analytics.

Analysis: 5 big takeaways from Infosys Q1FY20 earnings
Infosys Ltd raised its revenue forecast for the year on Friday after its first-quarter earnings were in line with the estimates of analysts. India’s second-biggest software services company is betting on robust demand from customers for its new-age digital services such as cloud, data and analytics. After TCS' subdued performance, the street will be happy with the results of Infosys, which were accompanied by a raised full-year growth guidance. Here are five big takeaways from the earnings:
  • Revenues in line, margins decline: First the numbers. Infosys reported dollar revenue growth of 2.3 percent quarter on quarter and of 2.8 percent on a constant currency growth basis, higher than what its competitor TCS reported (revenue growth of 1.6 percent, 2.3 percent on constant currency basis). Margins declined by 100 basis points to 20.5 percent, impacted by an increase in wages, visa costs and the rupee appreciation, but it was still better than the estimated 20.2 percent . Profits decline sequentially by 6.7 percent at Rs 8,802 crore, but were higher than estimates.
    • Revenue forecast increased after record number of deals: Infosys also raised its revenue guidance for the fiscal year ending March 2020 to between 8.5 percent  and 10 percent on constant currency basis from 7.50 percent and 8.5 percent. It is uncharacteristic of Infosys to revisit and improve its guidance for the full year as early as the first quarter given its conservative nature.
    • Hence, the street is open to the possibility of the company reporting double-digit growth for FY20, which could equal if not be better than that of TCS. Continued strength in securing deals ($2.7 billion in the first quarter alone compared to the record $6.3 billion it collated in FY19) is the reason for the optimism. The compnay now requires a compounded quarterly growth rate of 1.1-2 percent to achieve the guidance. Despite the appreciation of the rupee, the management is confident of meeting 21-23 percent EBIT margin guidance for FY20.
      • Robust internals: Revenue growth fanned out, with five verticals — financial services, communications, energy/utilities/resources, manufacturing and hi-tech —  delivering double-digit year-on-year growth on constant currency basis.
      • The company stepped up its capital return (returning money to shareholders via share repurchases and dividend handouts) program. This amounted to roughly 85 percent of the free cash flow compared with 70 precent earlier. The capital return program was another key positive along with the strength in digital growth at 41.2 percent year-on-year.
        The only negative in the internal numbers was the persistently high attrition at 23.4 percent.
        • Valuation comfort: Infosys also provides valuation comfort for investors. The stock trades at a PE multiple of 17X FY21e vs 21x for TCS. Given the likelihood of growth between the two large IT companies converging this year, there is a case for valuations to narrow. So while TCS is likely to continue to trade at a premium to Infosys given its consistency, leadership growth for the past several and higher margins, money in the short term may move from the Tata company to Infosys.
          • Positive brokerage verdict: The brokerage verdict is unanimously positive. Citi has upgraded the stock to a buy, citing positive risk reward while CLSA believes the company is gaining back control, with the stock being one of the fastest growing IT company in FY20. There is also the potential for upside surprises in FY21 as margins recover. CLSA maintains its buy call with a trading position of Rs 900 a share.
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