Infosys Q3 Results Review - Third-Party Items, Likely Longer Tenure Deals Are Key Issues: Nirmal Bang

Nirmal Bang Report

Infosys Ltd.’s Q3 FY23 constant currency QoQ revenue growth at 2.4% came in ahead of our 1.6% estimate, but with ~110 basis points gain coming from pass-through of ‘third-party items for service delivery to clients’.

Ebit margin at 21.5% was lower than our estimate (22.3%) as we believe that Infosys could not fully benefit from the 3% Indian rupee/U.S. dollar QoQ move due to currency hedging.

Post the revenue beat, Infosys has raised revenue growth guidance for FY23 to 16-16.5% in CC terms from earlier 15-16% but has kept the margin guidance intact at 21-22% (lower end indicated).

Infosys’ large deal total contract value at $3.3 billion (36% net new) is the best in the last eight quarters. We believe this has been helped by more cost optimisation deals where tenures are longer, resulting in lower annual contract value.

Infosys incrementally added ‘investment banking’ within the banking and financial services vertical to the already highlighted problem areas like mortgage, retail, hi-tech and telecom.

Pipeline was indicated to be strong, but we suspect that it is burgeoning due to slower decision making by clients and a greater number of large-sized cost optimisation deals with longer tenures.

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