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The street cheered Infosys Ltd’s margin performance for the quarter ending September (Q2FY23) with shares closing almost 4% higher on the NSE on Friday. Infosys’ Ebit (earnings before interest and taxes) margins rebounded to 21.5%, up 140 basis points (bps) sequentially, ahead of consensus estimates. One basis point is 0.01%.

The sharp recovery in margin allays concerns that the company’s growth is coming at the expense of profitability, said analysts at IIFL Securities Ltd. Peer Tata Consultancy Services Ltd (TCS) saw 90bps sequential rise in Ebit margin to 24%.

Stiff competition
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Stiff competition

Further, the total contract value of Infosys’ large deal wins stood at $2.7 billion, a seven-quarter high. The deal wins of TCS were satisfactory, but not particularly exciting.

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Infosys’ results were a mixed bag, but it helps that the positives outweighed the negatives. Both Infosys and TCS were neck-and-neck on revenue performance in Q2, clocking 4% sequential constant currency growth. While Infosys missed consensus estimates on this metric, TCS exceeded it. To be sure, as the chart here shows, over the past nine quarters, Infosys has beaten TCS in five quarters.

Ambit Capital’s relative preference for Infosys over TCS stays on likely better growth of revenue/earnings per share compound annual growth rate (CAGR) over FY22-25E at 8.9/11.2% (versus 6.9/8.1%). However, the broking firm maintains valuations of the Infosys stock are still not cheap.

Nevertheless, with relative earnings prospects improving, Infosys’ valuations may well get a boost. The FY24 price-to-earnings multiple for Infosys is 21.87x, lower than 23.82x of TCS, showed Bloomberg data. “We believe Infosys will deliver industry-leading growth among large caps, which warrants convergence of its valuation gap with TCS," said the IIFL report. In the near-term, the buyback could support investor sentiments for the stock.

That said, investors need to be mindful that Infosys’ management commentary was largely cautious. Hi-tech and telecom were another two segments, after retail and mortgages, where caution on tech spending is emerging, indicated the management in a call with analysts.

As such, Infosys’ growth guidance for FY23 implies a muted revenue performance in the second half. So, while Infosys’ investors sentiment may revive in the short-term, the overhang of a potential global recession remains. This risk is not unique to Infosys, but for the sector as a whole.

 

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