How Infosys shares may react tomorrow after Q2 earnings

In Q2FY23Infosys posted a consolidated net profit of 6,021 crore, an increase of 11% year-on-year, while revenue from operations came in 36,538 crores, up 23.43% annually.

during the quarter, Infosys Reported strong Q2 performance with year-over-year growth of 18.8% and sequential growth of 4.0% in constant currency. Year-over-year growth was in double digits across all business segments in constant currency terms. Digital comprised 61.8% of total revenue and grew 31.2% in constant currency. Operating margin for the quarter rose 140 bps sequentially to 21.5%. Big deal TCV for the quarter was strong at $2.7 billion, the highest in the last 7 quarters.

Further, the job loss rate of the company stood at 27.1% in Q2FY23 as against 28.4% in Q1FY23. Whereas the company made a net addition of 10,032 employees in Q2 – taking the total workforce to 3,45,218 as compared to 3,35,186 employees as on June 30, 2022.

Also, the company declared interim dividend of 16.50 per equity share. It has fixed October 28, the record date for dividend, while the payment date has been fixed as November 10, 2022.

Meanwhile, the company’s board approved a share buy back aggregation plan to 9,300 crores. The minimum value for buyback has been determined at a premium of 1,850 per equity share.

Should you invest in Infosys shares after Q2?

Emkay Global Financial Services expects Infosys stock to react between ‘neutral’ to ‘positive on exchanges’ after Q2 earnings. The company’s revenue was slightly below estimates, however, EBIT margin exceeded expectations. Among the key positives of Infosys Q2 are — EBITM recovery in Q2, a big deal of $2.7 billion, FY23 revenue growth guidance limited to 15-16% CC, and LTM attrition moderated by 130bps QoQ.

Meanwhile, JPMorgan expects the stock to react ‘moderately positive’, reflecting the EPS upgrade.

In its first cut report, JPMorgan said, “Infosys had the highest margin beat in the industry at the cost of a slight loss in growth momentum. Infosys’ 2Q23 missed out on print revenue but beat sharply on margins of 4%. CC QQ growth was 60/50 bps down from JPME/consensus. Although Ebit margin rose by 150 bps QQ to 21.5% and came in 140 bps/100 bps ahead of JPME/consensus. Big Deal TCV at $2.7 billion, 27% YY. FY23 CC revenue guide narrowed to 15-16% (14-16%) and margin guide also narrowed to 21-22% from 21-23% earlier.”

JPMorgan highlighted key positives of Infosys coupled with larger deals, a significant margin beat, a recoil of the upper end of revenue guidance and lower EBIT margin guidance.

Among the major downsides, JPMorgan believes that revenue will decline as it signals that growth has started to slow down. Also, the size of the buyback was at the lower end of expectations.

In its investment thesis, JPMorgan said, Infosys has aggressively realigned its strategic focus to scale digital transformation projects over the years. This includes significant investment in sales, increased large deal participation, and increased flexibility on deal structure. This has been rewarded with a sharp increase in DX projects, hybrid cloud adoption and large transformation deals around automation. It has also increased partnerships in the tech ecosystem. While Infosys has traditionally been a laggard in infra services, the transformation as a service and its restructuring has come at an opportune time.

“We anticipate double-digit earnings growth in FY 22-24. We see Infosys as a major winner in a market for Scale DX projects. However we rate the stock N as we believe That it’s on 23x 1 year FWD PE, it’s on full valuation.” JP Morgan note added.

JP Morgan has set a price target of Infosys for September 2023 is based on a 1,600 24x one-year forward P/E, which is its three-year average. “We believe this is justified by a relatively strong growth outlook versus peers, higher sustained payouts and a strong competitive position,” it added.

Further, Jefferies said in its first cut report, “Infosys’ 2QFY23 results were ahead of estimates, with revenue up 4% QoQcc in line, but margins up 140bps QoQ to 21.5%, which was positive due to lower subcontracting costs.” Surprised and trailed earnings. Big deal TCV of US$ 2.7 billion was healthy, and net hiring, though lower at 10k, was higher than peers. Infosys lowered the low end of its growth guidance by 100bps increased to 15-16% and lowered the upper end of our margin guidance by 100bps to 21-22%.”

Upon buyback, Jefferies stated that the size was in line with their expectations, however, the maximum price 1,850 per share is slightly ahead of his estimate.

Jefferies has assigned a buy rating on Infosys with a target price of 1,700

On valuation, Mitul Shah, Head of Research, Reliance Securities, said, “Infosys reported a strong 2QFY23 performance. Margins were above our expectations. In addition, the management raised its FY23 revenue growth guidance range from 14-16% to now. 15-16%, slightly lowering the range and revising its EBIT margin guidance to 21-22% (versus 21-23% earlier), indicating better performance during the 2H balance of FY23 Considering industry-leading double-digit revenue growth, increasing share of digital businesses (61% of revenue), potential improvement in EBIT margin levels from current levels, declining job loss rates, and record highs New TCV, we maintain our BUY recommendation on the stock.”

Infosys shares closed on BSE 1,419.75 each, down 0.64%. The market cap of the company is approx. 5,97,406.31 crores. In the second quarter of FY23, Infosys shares fell over 3% on Dalal Street. However, the shares have gained about 2 per cent so far in October.

Disclaimer: The views and recommendations given above are those of individual analysts or broking companies and not of Mint.