The Street closed Infosys Ltd’s margin performance for the quarter ended September (Q2FY23) on Friday with nearly 4% higher shares on the NSE. Infosys’ Ebit (earnings before interest and taxes) margin reached 21.5%, up 140 basis points (bps) sequentially, ahead of consensus estimates. One basis point is 0.01%.
Analysts at IIFL Securities Ltd (TCS) said the sharp recovery in margins allays concerns that the company’s growth is coming at the cost of profitability. Peer Tata Consultancy Services Limited (TCS) saw a gradual increase of 90 bps in Ebit margin.
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In addition, the total contract value of Infosys’ big deal wins was $2.7 billion, a seven-quarter high. TCS’ deal win was satisfying, but not particularly exciting.
Infosys’ results were mixed, but it helped that the positives outweighed the negatives. Infosys and TCS were both neck and neck on revenue performance in Q2, seeing 4% sequential constant currency growth. While Infosys missed the consensus estimates on this metric, TCS surpassed it. Certainly, as the chart given here shows, in the last nine quarters, Infosys has outperformed TCS in five quarters.
Ambit Capital’s relative preference for Infosys over TCS remains on a better growth of revenue/earnings per share compound annual growth rate (CAGR) at 8.9/11.2% (versus 6.9/8.1%) from FY22-25E onwards. However, the broking firm says the valuation of Infosys’ stock is still not cheap.
Nevertheless, with the improvement in relative earnings prospects, Infosys’ valuation may well get a boost. Data from Bloomberg shows that the FY24 price-to-earnings multiplier for Infosys is 21.87x, lower than TCS’s 23.82x. “We are confident that Infosys will deliver industry-leading growth among large caps, which guarantees convergence of its valuation gap with TCS,” the IIFL report said. In the short term, the buyback could support investor sentiment for the stock.
That said, investors need to be wary that Infosys’ management remarks were largely cautious. Hi-tech and telecom were the other two segments, followed by retail and mortgage, where caution is emerging on tech spending, management indicated in a call with analysts.
Hence, Infosys’ growth guidance for FY23 means that revenue performance in the second half has been sluggish. Hence, while investor sentiments of Infosys may revive in the short term, there remains much of a potential global slowdown. This risk is not unique to Infosys, but to the region as a whole.
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