* Reported revenue is in line with expectation, led by 1.6% qoq volume growth. Improvement in OPM is 10bps better than expectation, as Infosys benefitted from better utilization and cost efficiencies.
* Guidance has been retained both on revenue growth as well as profitability front. Management remains optimistic about outlook for CY18. Digital offerings are driving growth in structurally challenged BFSI/Retail verticals.
* OPM improved by 10bps to 24.3% despite partial wage hike impact. However, potential for further gains in OPM is limited, owing to lack of headroom for improvement in levers such as utilization (now at 85%, net hiring soft YTD), delivery mix (demand to be more onsite centric) and SG&A efficiency (expense flat in 9MFY18).
* We expect revenue/earnings growth CAGR of 6%/5% over FY18-20E and expect the stock to underperform given its soft growth metrics (9MFY18 TCV down 19%) and likely risk of weak profitability growth. We retain our preference for TCS among Tier I names.
Guidance retained; Commentary positive for CY18 based on spend recovery
In his first address, new CEO Salil Parekh highlighted 4 aspects (New Geography, Client, People and Service Line) that the management would evaluate threadbare before unveiling its strategy for FY19E in April. The management is confident about its outlook given the recent client interactions across verticals, deal wins (added US$779mn in TCV) and growth in Digital (up 6.5% qoq). The company won 8 large deals during Q3FY18, of which 5 came in Financial Services vertical. Thus, despite soft revenue in BFSI, the company is confident of a demand revival, as it expects pick-up in discretionary spends in the vertical in CY18. BFSI in the US remains subdued but is buoyant in Europe. Digital-led spends are driving prospects in the BFSI/Retail despite structural issues. Digital currently accounts for ~24% of total revenue. KMP exits continues as Mr Rajesh Murthy - President of ECS vertical (22% of revenue) is leaving after 26 years of service. We believe that the new CEO has several internal challenges to tackle over and above the external challenges and the same may affect his bandwidth and growth performance in the near term.
Absence of CEO impact visible on TCV/Top client metrics; Maintain REDUCE
We believe that the traction in large deal TCV (down in 9MFY18 by 19% yoy) and business momentum in top accounts (top 10 clients revenue down 2.5% yoy) have been affected in the absence of full-time CEO and the recovery of the same would be one of the early challenge for the new CEO. We also believe that maintenance of profitability would be a challenge if growth does not pick up in CY18 in the absence of any further efficiency levers, weak INR realization, increased investment intensity (reskill, onsite hiring) and unfavourable operating leverage. We have largely retained our estimates for FY19E/20E and expect Infosys to underperform in the near term following the recent upmove ahead of any visible recovery. We reiterate REDUCE with TP of Rs970, valuing it at 13x FY20E earnings (30% discount to TCS valuation).
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