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  • Stock recommendation: Infosys — Add — TP Rs 1,400

    Publish date: July 18, 2018

    Q1 earnings broadly on expected lines

    Infosys reported a 3.7% net profit and 2.3% revenue growth (c/c) in the first quarter of FY2019, which are broadly in line with our estimates.

    Key Highlights

    We recently met the company’s chairman, chief financial officer (CFO) and the director strategy and here are some of the takeaways from the meeting:

    • The company expectedly announced an operating margin of 23.7%, a marginal dip of 40 bps yoy. The EBIT margin declined mainly due to wage revision, normalization of general and administrative expenses and investments in business.
    • The financial services, which comprises 31.8% of revenues, saw a marginal decline of 0.2% qoq. On the upside, the company announced the most number of deals in eight quarters and added four clients that would contribute US $100 million each to the company’s revenue.
    • The attrition rate was a worrying 23% on a quarterly basis.
    • Earnings per share grew at 9% yoy to reach Rs 16.6, while return on equity (RoE) also increased compared to the previous quarter.
    • The North American and European markets were weak this quarter, but the management expects them to rebound soon.
    • Around 85% of workers are expecting a wage revision. The remaining will get a hike in the next quarter.

    Valuation & outlook

    The current results are a mixed bag but we feel that the company is heading in the right direction. There are a few issues though. First, the high attrition levels of junior-to-mid level employees is of high concern. Second, the company’s risk-averse policies are keeping them away from signing large multi-service deals.

    However, we feel that the company’s stock valuation is on the lower side. In addition, the return on equity is likely to be around 23.5% in FY2020E.

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