Infosys - Good Show; Treading The Right Path; Result Update Q3FY15 :: Edelweiss

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Infosys’ Q3FY15 revenue of USD2.2bn (up 0.8% QoQ) came in line with Street’s estimate (0.9%), while EBITDA margin of 28.7% (up 40bps QoQ) surpassed the 28.1% estimate. Dr. Vishal Sikka’s mantra of renewing core services, innovating in newer services and focus on retaining talent through learning, training & incentives seems to be the right antidote to alleviate the lower growth and margin malaise. The quarter offered a few glimpses of this strategy working its magic-4.2% volume growth (highest in past 3 years) and fall in absolute attrition. We remain confident that Dr. Sikka’s strategy will propel growth and enhance margin in the long run. We maintain our FY16 revenue growth estimate of 12.5% and estimate 13.0% growth for FY17. Maintain ‘BUY’ with target price of INR2,650 (18x FY17E EPS of INR147.2) as we roll over valuations to FY17.

Broad-based volume-led growth in a seasonally weak quarter

Q3FY15 constant currency revenue growth of 2.6% was driven by 4.2% volume spurt, highest in past 3 years. Further, in a seasonally weak quarter, key segments like financial services, manufacturing, North America and Europe surged 4.0%, 2.9%, 2.3% and 1.9%, respectively, in constant currency-commendable given less number of working days.

Dr. Sikka’s strategy to enhance growth and margin trajectory

While it would be premature to draw concrete conclusions about the effectiveness of Dr. Sikka’s renew-new-learn mantra, we believe his focus on renewing core services via automation, innovation, use of artificial intelligence (AI) and digital technologies is the right way given the cost pressures in traditional services. At the same time, focus on innovation in new services via design thinking, creating tools & platforms will help Infosys differentiate amongst peers. Also, his stress on learning and training of employees and creating an environment for them to excel will help resolve manpower and attrition issues.

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