Infosys Ltd (NS:)

Infosys’ strong deal wins (highest-ever) were offset by sluggishness in volumes and a slower pace of conversion resulting in cuts to our FY25E growth estimates. While Q2 revenue performance was higher than estimated on certain one-offs and margin expansion was in line, successive quarters of growth guidance cuts reflect near-term uncertainty/pressure on discretionary.

Notwithstanding the weak/washout growth in FY24E, FY25E trajectory is expected to improve, supported by visibility from several mega deal wins i.e. (1) net-new large deals of USD 3.7bn in Q2 is >90% of FY23 net-new large deal bookings and (2) the net-new large deal bookings is 1.3x the incremental revenue addition over the next two years. While the pass-through component increased sharply in Q2, INFO’s operational elements will strengthen, supported by several interventions to improve utilization (scope for 300-400bps improvement), pyramid, pricing, indirect cost, and critical portfolio. We cut our TP by 3% and maintain ADD on INFO, based on 20x Sep-25E EPS (5Y/10Y average at 22x, 19x), limited near-term catalyst.

HCL Technologies Ltd (NS:)

HCL Tech’s (NS:) Q2 print was lower on revenue but surprised on margin (stronger services margin supported by a recovery in the ERS segment). While the growth guidance for FY24E was lowered, it still implies strongest sequential performance in 3Q/4Q within peer set, supported by (1) all-time high new deal wins of USD 4bn at 2x the quarterly bookings rate and ramp-up of Verizon (NYSE:) deal (execution as per schedule starting November), (2) software business 3Q seasonality and full-quarter consolidation of ASAP acquisition, strong exit to FY24 will catapult FY25E growth to double-digit growth.

Key positives include recovery in ERS business following recent underperformance to pure-play peers, continued outperformance in BFSI vertical vs. peers and strong improvement in operating performance with scope for further increase in margin. On the flip side, volatility in discretionary (cut in the guidance) and weaker cash generation were the negatives. We marginally cut our fair value and maintain ADD on HCLT with a TP of INR 1,285, based on 18x Sep-25E EPS (5Y/10Y average at 17x, 16x).

Infosys

Recovery Pushed Out Further

Q2FY24 highlights: (1) INFO’s revenue print was USD 4,718mn, +2.2% QoQ and +3.6% YoY; management commentary points to regular H2 seasonality (furlough/working days). (2) INFO lowered the top end of its guidance and FY24E revenue guidance stands at +1 to +2.5% CC (+1 to +3.5% CC earlier). (3) Within verticals, BFSI (sub-segments of mortgage, IB, payments impacted), communication and hi-tech lagged while manufacturing (five large deals in Q2) and life-sciences (two large deals in Q2) verticals outperformed on a YoY basis.

(4) INFO booked 21 large deals with a TCV of USD 7.7bn (48% being net-new), which included four mega deals (such as Liberty Global (NASDAQ:) EUR 1.5bn TCV 5 years). (5) EBITM improved to 21.2%, +42bps QoQ (in-line) and margin guidance of 20-22% for FY24E was maintained (despite growth guidance cut over the last two quarters). (6) INFO will roll out a wage hike from November, which was put on hold earlier.

Outlook: We have factored INFO’s USD revenue growth at 2.9/6.5/8.0% for FY24/25/26E, implying flat CQGR in H2FY24 and 2.2% and 1.8% for FY25/26E. EBITM factored at 21.0/22.0/22.0% for FY24/25/26E, translating into an EPS CAGR of 9% over FY23-26E. INFO trades at 21x and 19x FY25/26E valuations, which is a ~15% discount to TCS’ valuations (at a historical average discount).

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