Infosys’s Mar’17 quarter results are lower than street/Emkay estimates on the revenue front. Flat QoQ constant currency revenue growth implies that the weakness that Infosys has typically faced in Q4 has come back to haunt it in FY17 as well (after the blip in FY16). EBIT margins have declined by ~50 bps sequentially to 24.6%, albeit within the guided range of 24-26%.
Revenue guidance appears fine but implies acceleration in growth in subsequent quarters
The company has provided a revenue outlook for FY18 of 6.5-8.5% constant currency growth (6.1-8.1% YoY revenue growth in US$ terms) which implies a significant acceleration in growth rates over the next few quarters for the company to achieve the outlook. (The guidance implies a 2.2-3% QoQ CQGR which is tad higher than the <1.5% CQGR achieved in FY17). The company has reset it’s EBIT margin outlook to 23-25% for FY18 V/s historical outlook of 24-26% (possibly resulting from currency headwinds).
While we do see about 3-4% cuts to our FY18/19E EPS of Rs 68/75, we would be looking for more clarity on the confidence in the revenue growth pick up from the management on the concall. Additionally the company has indicated that it will make return Rs 130 bn to shareholders during FY18 and now intends to pay upto ~70% of free cash flow every year (V/s 63% of free cash flow in FY17). Company has announced a final dividend of Rs 14.75 for FY17.
We currently have a ACCUMULATE rating on Infosys with a TP of Rs 1,080. At CMP of Rs 967, stock trades at 14.2x/12.9x FY18/19E P/E.
Mar’17 quarter results highlights
- Revenues at US$ 2,569 mn (0.7% QoQ, 5% YoY and flat QoQ in constant currency terms) lower than our estimates of 1.7% QoQ US$ revenue growth. IT Services volume growth at 1.2% QoQ (with onsite volumes up 1.9% QoQ and offshore volumes up by 0.9% QoQ).
- EBIT margins declined by 50 bps QoQ to 24.6% lower than our expectations of 24.8%
- Profits at Rs36bn (-2.8% QoQ,+0.2% YoY) tad ahead of expectations aided both by higher other income and lower than expected taxes.
- Quarterly Annualized attrition has declined by 130 bps QoQ to 17.1%, although is still high.
Operating metrics performance at a glance
Volumes
· Volumes (IT Services): 1.2%QoQ and 7.7%YoY.
· Utilization without trainees: 82%, up 10bps QoQ.
· Utilization with trainees: 78.2%, up 40 bps QoQ.
Growth by Verticals (all in constant currency terms)
- Financial Services: 0.5%QoQ
- Manufacturing: 0%QoQ
- Retail: +3.1%QoQ
- ECS: +2.8% QoQ
Growth by Geographies (all in constant currency terms)
- US: 1.2%QoQ
- Europe: -1.6%QoQ
- ROW: -1.3% QoQ
- India: -6.9% QoQ
Growth by client metrics
- Top 1: 7.2%QoQ
- Top 5: -0.1%QoQ
- Top 10: 1.2% QoQ
- Non Top 10: 0.6% QoQ
Infosys: Mar’17 quarter result summary
|
In Rs mn
|
Q4FY17A
|
Q3FY17
|
QoQ(%)
|
Q4FY16
|
YoY(%)
|
Q4FY17E
|
|
Net sales (US$ Mn)
|
2,569
|
2,551
|
0.7%
|
2,446
|
5.0%
|
2,593
|
|
Net sales (Rs, Mn)
|
1,71,200
|
1,72,730
|
-0.9%
|
1,65,500
|
3.4%
|
1,72,708
|
|
Operating expenses
|
1,29,080
|
1,25,060
|
1,19,110
|
1,25,448
|
||
|
EBIT
|
42,120
|
43,340
|
-2.8%
|
42,200
|
-0.2%
|
42,904
|
|
Margins (%)
|
24.6
|
25.1
|
(49)
|
25.5
|
24.8
|
|
|
Other income
|
7,460
|
8,200
|
7,710
|
6,807
|
||
|
Pre-tax profit
|
49,580
|
51,540
|
-3.8%
|
49,910
|
49,711
|
|
|
Tax provided
|
13,300
|
14,460
|
13,940
|
14,416
|
||
|
Profit after tax
|
36,280
|
37,080
|
35,970
|
35,295
|
||
|
Emkay Net profit
|
36,030
|
37,080
|
-2.8%
|
35,960
|
0.2%
|
35,295
|
|
EPS, Rs
|
15.8
|
16.2
|
|
15.7
|
|
15.4
|