I respectfully don’t agree. My views are here
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Infy and the Income Tax Portal - Apparently the deal was signed in 2019 for 4242 Cr and three years done and even now 750 ppl are working on this single program !! And the govt is asking to deploy more resources on this, As reported by BusinessLine, out of this 4242 Cr contract value only 164.5 Cr has been paid so far to Infy !! What went wrong ?
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Dust seems to be settling down in taxportal issue.
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Concall
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We talk about MOATs and one of the biggest understated MOATs in India in my opinion is the Indian talent pool available for the IT industry.
With a working population so young, relatively fluent in the global language and educational institutes churning out good engineering/software talent year after year, it’s no surprise outsourcing as an offering and IT has grown the way it has.
Additionally, just trying to qualitatively evaluate the position of the IT sector:-
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It will all depend on if growth can carry on. But listening to management of Infy, TCS and other companies really does point to a strong structural shift ongoing. This could last for many years to come, post COVID a tech enabled organisation is almost a necessity in terms of cost efficiencies and working methodology
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Infy as well as other IT companies are sitting on cash, and would be well placed to recognise acquisitions offering them growth engines
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Indian IT is a story that in my opinion should continue to gain market share over global peers. The ‘Indian talent pool’ MOAT I mentioned above places them in a good position to address challenges they will face in high growth periods - even in the case of attrition Indian IT companies should do well. Till the demand is there - the Indian players should not be more affected than competition even if the supply is limited.
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In case we are heading to a high interest rate environment in the coming years, the dollar/INR metric should also play a part in favouring the IT companies in the next few years if the dollar strengthens.
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Even if valuations have been significantly re rated already - these companies are not at exorbitant PE multiples - versus some fast growth peers in other sectors. And if digitisation continues to go ahead in the same stead, these could well be the engines of growth in the coming years at these lower PE multiples and higher ROCE metrics than other favoured sectors in the market.
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As boring and simple as a business idea as they come - the kind of companies which usually end up doing well!
Disclosure : Invested, Infy is my largest holding. Transactions in last 30 days. This is just personal opinion and not investment advice.
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Very average result from Infosys. Below estimates on revenue growth, deal wins, attrition and margin front. Market has priced in a lot more growth that this and stock might be hampered tomorrow.
Interesting conference call from Infosys, much more positive than yesterdays steep ADR price cut.
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Strong revenue growth for FY 21-22 @ over 19 percent. Q4 revenue growth over Q4 last year at over 20 percent.
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Guidance of 13-15 percent in revenue growth is stronger than last years guidance. Despite analysts checking on this, management maintained that strong demand environment was present and the deal pipeline continued to look strong.
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Margin headwinds came from coming back of travel cost, visa costs. Q4 is also a seasonally weak quarter with slightly less number of days. They mentioned the positives here were that attrition and sub contractor costs were both heading towards tapering now.
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Fresher hiring continues. They have committed to hire 50k+ freshers for next year, and hired 22k freshers in this quarter. They want to bring utilisation to more comfortable levels for them as well.
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Q4 has a provision for a contract issue - but management confirmed this is very low @ less than 1 percent and they expect it to reverse.
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Management constantly mentions digital capabilities and strong acceptance for the same leading to market share gains versus peers and strong growth.
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Talking about thoughts to invest in growth, could mean some interesting acquisitions in the coming year. They also talk about interesting opportunities in SAAS in the media meet, as well as the successful launch of a Metaverse offering (although these would be very small currently).
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They have less than 100 employees in Russia. They do not currently work with Russian clients and will also not do so in the future (this was surprising considering large Russian banks). Continue to expand their facilities in Poland and other adjoining Eastern European countries.
Discl : Invested, biased. Not investment advice
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- Revenue trajectory starting to moderate : Infosys numbers were broadly in-line on revenues although it is known that growth rates are coming off for the sector (evident in TCS nos too) – partly due to battling a steep base and partly from some softness in demand. The larger picture for demand and deal wins remains sanguine but at the margin, there are some early signs of softness emerging.
- Infosys delivered 20% CC YoY growth in FY22 and has guided for 13-15% for FY23. Note that Infosys has in the past, both over and undershot its starting guidance – usually a function of market conditions and global macro. That they beat starting guidance for FY22 handsomely does not necessarily imply they will do so in FY23.
- More worrying was that the QoQ momentum in revenue growth slowed down substantially in 4QFY22. QoQ growth of 1% compares to an average 6% QoQ growth for the preceding six quarters. Put another way, Infy added just US$30mn in incremental QoQ revenues in 4Q versus the average of US$190mn previous six quarters.
- On a YoY basis, I would expect (as also implied by the guidance) the revenue growth trajectory to moderate from high teens to low teens as we go through FY23. In the past, slowing revenue growth has impacted valuation multiples negatively. Note that a low teens growth is hardly worth complaining about if you are a long-term shareholder but will temper down elevated expectations of sustained mid to high teens growth.
- Large deals plateauing : Large deal wins have remained steady and have averaged US$2.4bn for the last four quarters. However, the surge in deal wins that we saw in FY20 and FY21 seems behind. Deal wins grew 44% in FY20 and another 57% in FY21 while they fell 33% in FY22. There is always some lumpiness to this but seems the trajectory has plateaued.
- Hiring trends suggest otherwise with headcount growth accelerating through the year. However, some of this is partly to compensate for the weak hiring in the early quarters post-COVID. This will likely be offset by more measured hiring trends next year. Infact, the strong hiring this year will lead to some drop in utilization rates next year, admitted management. This is why I am taking the strong hiring number with a pinch of salt.
- While I have argued above the growth rates are likely coming off to more normalized 10-11% growth levels and this will temper expectations, the much larger negative surprise this quarter came from the hit on operating margins.
- Margin headwinds intensifying : FY21 had a solid 320bps margin tailwind for the sector due to 1) forced higher offshoring share 2) 4% INR depreciation (each 1% adds ~25 bps) 3) increase in utilisations 4) travel restrictions and WFH (lower office costs). There was a belief that some of this will hold and make way for a higher new normal for margins. However, that does not seem to have played out. Infosys gave up 150bps margins in FY22 and has guided for 21-23% EBIT margin in FY23 (below expectations) which at the midpoint will imply a further 100bps decline in FY23. Margins are thus heading back to where they were pre-COVID.
- Inflationary trends globally and in India will weigh on wage costs at a time when attrition is at very high levels. LTM attrition for 4QFY22 was 28% (probably an all-time high). Some argue that the company will use pricing as a lever to offset this and hence manage margin pressures. This is only partly true – pricing as measured by revenue per employee in USD terms has grown at a 1% CAGR over the last seven years. Pricing power is limited in this business and a lot depends on INR depreciation.
- Expect a slowing earnings trajectory next two years : In terms of numbers, this implies mid-single-digit EBIT growth for the next four quarters versus mid-teens for the last four quarters. On an annual basis, earnings growth for Infosys is likely to be 9-10% CAGR over FY22-24 versus ~16% CAGR over FY20-22. A slowing earnings growth trajectory does tend to weigh on multiples, particularly when the starting point is elevated (currently trading at ~50% above LTA). The risk-reward thus seems not very good from here on. In more medium-term out, there is nothing wrong with the business although stock prices may take a breather here.
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Some quick points from my contacts:-
- Actual attrition seems 40% and not 28%
- Attrition is likely to remain at elevated levels in the near term; to mitigate this risk firms of the likes of Infosys will be increasingly looking at employing folks in tier 3/4/5 cities and towns that helps to contain employee costs while providing more employment opportunities away from tier 1/2 cities/metros
This should be a win-win as people need not travel away from home for employment and the lower cost of living in tier 3/4/5 cities/towns should put more money in employee’s hands.
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Infosys has introduced blockchain based a highly efficient transaction delivery platform with turnaround time decreasing from weeks to hours. In the first phase it has collaborated with 6 major banks (Federal Bank, HDFC Bank, HSBC, ICICI Bank, RBL Bank and State
Bank of India) .
Its a great achievement in sense of the real time application of the product and with regards to the technology that has been used in backend.
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Key highlights of the Infosys Q2 result.
BOARD APPROVED SHARE BUYBACK UPTO 9300 CR @ ₹1850/share via OPEN Market
Q2 CONS NET PROFIT 60.21B RUPEES VS 53.6B (QOQ); EST 56.38B | 54.2B (YOY) ||
Q2 REVENUE 365.4B RUPEES VS 344.7B (QOQ); 296B (YOY)
CO DECLARED AN INTERIM DIVIDEND OF RUPEES 16.50 PER SHARE
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Was there any explanation of the sudden resignation by Ravi Kumar - President and also the racial bias law suit?
How is buying back your own shares at close to all-time highs good capital allocation? Especially when you are starting at a slowdown in business a few quarters hence and valuations remain above 10-year averages? They could have declared a large special dividend (so shareholders can decide what to do with the cash returned) or delayed their buyback to next year when valuations get more reasonable. Like Mr. Buffet says, buybacks are good only if companies can buy back their own shares at prices well below intrinsic value.
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Just reading Essays of Warren Buffet by Lawrence Cunningham, and same thing is written in this book also. Buy back at high valuation is not a good capital allocation.
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If I understand correctly, 1850/share is the maximum buyback price they will take the shares back. They can buyback at any price between CMP - 1850. Its not that they have to buyback everything only at 1850. Its an open market buyback so there is no fixed buyback price like the tender route where the company has to pay a fixed buyback price to each shareholder who tenders the shares. Last 2 buybacks from Infosys are open market buybacks.
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You are 100% correct.
Yes. TCS did the same mistake by doing a buyback at Rs4500 per share in March 2022 while their shares are now trading 30% lower. Time will tell if Infosys buying back its own stock at close to 1800 per share levels was a prudent move for its shareholders (especially those who do not participate).
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