RESULTS REVIEW 1QFY19 14 JUL 2018

Infosys BUY

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Recovery aheadInfosys (INFY) delivered in-line rev and operating performance and recorded robust large deal bookings. Revenue came at USD 2,831mn, 0.9/6.8% QoQ/YoY based on 2.3/6.0% CC, and maintained its FY19 rev guidance of 6 to 8% CC YoY. EBIT% stood at 23.7%, -101bps QoQ impacted by wage increase of ~85% of employees, higher sub-contracting expense & G&A spend (onsite expansion). This was offset by increase in utilisation to 85.7% (at all-time high).

We maintain our positive outlook on INFY based on (1) Rapid acceleration in Digital (USD 3.2bn portfolio growing at 6.1% CQGR) driven by cloud transformation, IoT, cybersecurity, UI-UX projects, (2) Improving large deal trajectory (USD 1.1bn TCV in 1Q vs USD 3bn in FY18) and strong large account metrics (four acs added to >USD100mn category), (3) Recovery in BFSI ahead (40% of 1Q deal TCV in BFSI), and (4) Strong outlook for NorthAm geo across Retail, E&U and BFSI verticals (7 out of 8 large deal wins from NorthAm). Revise earnings lower ~1% to reset margin est by -60bps. Expect rev/EPS CAGR of

8.7/9.0% over FY18-20E factoring USD rev growth at 7.7/9.6% and EBIT% at 24.2/24.3% for FY19/20E respectively. Growth est. imply CQGR of 2.6%/2.1% for FY19/20E. Maintain BUY with TP of Rs 1,415, 18x FY20E-EPS.

Highlights of the quarter (1) INFY booked 8 large deals of USD 1,116mn TCV with

3 deals from E&U vertical, 3 from Retail and 2 from BFSI, 47% of TCV was net-new. (2) Attrition increased (including high-performance category attrition) to 20.6% in 1Q, however management expects this to reduce ahead, (3) Softness in BFSI performance attributed to project delay by large European client and on account of in-sourcing, (4) Onsite-offshore mix unlikely to change despite increase in local hiring, (5) Large deal wins supported by investments in S&M and sourcing advisory.

Near-term outlook: Announcement of mode of capital allocation for USD 1.6bn, recovery in BFSI vertical and attrition trends will be key factors.

Financial Summary YE March (Rs bn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%) FY16 FY17 FY18 FY19E FY20E Net Revenues 191.28 170.78 12.0 180.83 5.8 624.41 684.85 705.22 795.77 872.27 EBIT 45.37 41.11 10.4 44.72 1.5 156.20 169.02 171.48 192.83 212.02 APAT 38.07 35.34 7.7 37.77 0.8 134.90 143.53 147.34 157.07 170.84 Diluted EPS (Rs) 17.5 16.2 7.7 17.4 0.8 62.0 66.0 67.7 72.2 78.5 P/E (x) 21.2 20.0 19.5 18.2 16.8 EV / EBITDA (x) 14.7 13.3 13.4 12.1 10.8 RoE (%) 23.2 22.0 24.5 24.1 25.7 Source: Company, HDFC sec Inst Research # Consolidated

INDUSTRY IT CMP (as on 13 Jul 2018) Rs 1,317 Target Price Rs 1,415 Nifty 11,019

Sensex 36,542

KEY STOCK DATA

Bloomberg INFO IN

No. of Shares (mn) 2,184

MCap (Rs bn) / ($ mn) 2,863/42,019

6m avg traded value (Rs mn) 5,706

STOCK PERFORMANCE (%)

52 Week high / low Rs 1,358 / 853

3M 6M 12M Absolute (%) 13.4 23.1 35.9 Relative (%) 6.5 17.5 21.9

SHAREHOLDING PATTERN (%)

Promoters 12.90

FIs & Local MFs 22.50

FPIs 34.87

Public & Others 29.73

Source : BSE

Apurva Prasad apurva.prasad@hdfcsec.com +91-22-6171-7327 Amit Chandra amit.chandra@hdfcsec.com +91-22-6171-7345

INFOSYS: RESULTS REVIEW 1QFY19

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Quarterly Consolidated Financials Snapshot Particulars (Rs bn) 1QFY19 1QFY18 YoY (%) 4QFY18 QoQ (%) Net Revenues (USD mn) 2,831 2,651 6.8 2,805 0.9 Net Revenues 191.28 170.78 12.0 180.83 5.8 Employee Expenses 118.52 104.50 13.4 110.96 6.8 SG&A And Other Operating Expenses 23.03 20.67 11.4 20.57 12.0 EBITDA 49.73 45.61 9.0 49.30 0.9 Depreciation 4.36 4.50 (3.1) 4.58 (4.8) EBIT 45.37 41.11 10.4 44.72 1.5 Other Income 4.56 7.43 (38.6) 5.34 (14.6) PBT 49.93 48.54 2.9 50.06 (0.3) Tax 13.81 13.71 0.7 13.16 4.9 RPAT 36.12 34.83 3.7 36.90 (2.1) E/o (adj for tax) (1.95) (0.51) NA (0.87) NA APAT 38.07 35.34 7.7 37.77 0.8 Source: Company, HDFC sec Inst Research Margin Analysis Particulars 1QFY19 1QFY18 YoY (bps) 4QFY18 QoQ (bps) Employee Expenses % Net Revenues 62.0 61.2 77 61.4 60 SG&A And Other Expenses % Net Revenues 12.0 12.1 (6) 11.4 66 EBITDA Margin (%) 26.0 26.7 (71) 27.3 (126) EBIT Margin (%) 23.7 24.1 (35) 24.7 (101) Tax Rate (%) 27.7 28.2 (59) 26.3 137 APAT Margin (%) 19.9 20.7 (79) 20.9 (98) Source: Company, HDFC sec Inst Research

Revenue stood at USD 2,831mn, 2.3/6.0% QoQ/YoY in CC terms EBIT margin stood at 23.7%, -101bps QoQ impacted by wage increase (-100bps), Higher G&A and higher sub-contracting cost (-140bps), offset by INR depreciation (+100bps) and efficiency & utilisation improvement (+40bps) APAT came at Rs 38.07bn adj. for write-down of Rs 2.7bn attributed to Panaya (Rs 1.18bn in 4Q)

INFOSYS: RESULTS REVIEW 1QFY19

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QoQ CC USD Revenue Growth Trajectory YoY CC USD Revenue Growth Trajectory

Source: Company, HDFC sec Inst Research

Source: Company, HDFC sec Inst Research

EBIT Margin Trajectory Large Deal TCV Trend

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

INFY declared equity share bonus of 1:1 >USD 100mn client category increased by four (two from BFS) taking the count to 24 Wage hike of 6 to 8% offshore and 1 to 2% onshore for 85% of employees impacted 1Q margin, wage increase of remaining employees in 2Q EBIT margin guidance of 22 to 24% maintained

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INFOSYS: RESULTS REVIEW 1QFY19

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Vertical Revenue Break-up (% Contribution) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Financial services 33.0 33.1 32.8 32.5 31.8 Retail 16.2 16.0 16.2 15.9 16.6 Communication 12.6 12.4 12.4 12.9 12.7 Energy, Utilities, Resources & Services 11.3 11.7 12.0 12.0 12.4 Manufacturing 9.3 9.4 9.6 9.6 9.6 Hi Tech 7.3 7.2 7.2 7.4 7.4 Life Sciences 6.6 6.8 6.6 6.7 6.6 Others 3.7 3.4 3.2 2.9 2.9 Total 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC Sec Inst Research, Reporting changes Vertical-wise Revenue Growth (QoQ, %) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Financial services NA 3.3 0.1 1.0 (1.5) Retail NA 1.1 2.7 (0.1) 5.0 Communication NA 1.6 1.0 5.6 (0.6) Energy, Utilities, Resources & Services NA 6.6 3.4 1.9 4.3 Manufacturing NA 3.7 3.0 2.2 1.0 Hi Tech NA 1.4 0.8 4.6 1.6 Life Sciences NA 5.8 (2.2) 4.1 (0.9) Others NA (4.1) (5.1) (7.1) 1.3 Total NA 2.9 1.0 1.8 0.9 Source: Company, HDFC Sec Inst Research, Reporting changes

Among verticals, Retail (16.6% of rev) and E&U (12.4% of rev) led the growth at 6.4% QoQ and 5.3% QoQ CC while BFSI (31.8% of rev) was flat in CC terms

INFOSYS: RESULTS REVIEW 1QFY19

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Services Break-up (% Contribution) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Digital Services (a) 22.4 23.6 24.2 25.3 26.7 Core/ Legacy Services (b) 72.2 71.2 70.4 69.8 68.5 Total Services (A) (a+b) 94.6 94.8 94.6 95.1 95.2 Digital Product & Platform (c) 1.5 1.6 1.9 1.5 1.7 Core/ Legacy Product & Platform (d) 3.9 3.6 3.5 3.4 3.1 Total Product & Platform (B) (c+d) 5.4 5.2 5.4 4.9 4.8 Digital Total (C) (a+c) 23.9 25.2 26.1 26.8 28.4 Core/ Legacy Total (D) (b+d) 76.1 74.8 73.9 73.2 71.6 Total Revenue (C+D) or (A+B) 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC Sec Inst Research Services Growth (QoQ, %) 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Digital Services NA 8.4 3.6 6.4 6.5 Core/ Legacy Services NA 1.5 (0.1) 0.9 (1.0) Total Services NA 3.1 0.8 2.4 1.0 Digital Product & Platform NA 9.8 19.9 (19.6) 14.4 Core/ Legacy Product & Platform NA (5.0) (1.8) (1.1) (8.0) Total Product & Platform NA (0.9) 4.9 (7.6) (1.1) Digital Total NA 8.5 4.6 4.5 7.0 Core/ Legacy Total NA 1.1 (0.2) 0.9 (1.3) Total Revenue NA 2.9 1.0 1.8 0.9 Source: Company, HDFC Sec Inst Research

Digital grew 7% QoQ while core/legacy declined 1.3% QoQ Analytics, IoT, UI-UX, Core transformation and cloud migration driving growth in digital Growth in Digital driven largely by increase in size of projects from existing customers Digital % of rev highest in Hi-tech, Retail and communication verticals

INFOSYS: RESULTS REVIEW 1QFY19

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Geographic Revenue Break-up (% Contribution) 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 North America 62.0 62.3 61.1 60.6 60.4 59.4 60.0 Europe 22.2 22.1 22.4 23.2 24.4 24.8 24.3 India 3.4 3.2 3.6 3.3 3.0 2.8 2.6 Rest of the World 12.4 12.4 12.9 12.9 12.2 13.0 13.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC Sec Inst Research Geographic Revenue Growth (QoQ, %) 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 North America (0.6) 1.2 1.2 2.1 0.7 0.1 1.9 Europe (2.7) 0.3 4.6 6.6 6.2 3.5 (1.1) India (1.4) (5.2) 16.1 (5.7) (8.2) (5.0) (6.3) Rest of the World (3.0) 0.7 7.4 2.9 (4.5) 8.5 1.7 Total (1.4) 0.7 3.2 2.9 1.0 1.8 0.9 Source: Company, HDFC Sec Inst Research

Growth was secular across NorthAm and Europe posting 2% and 2.1% QoQ CC

INFOSYS: RESULTS REVIEW 1QFY19

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Headcount, Attrition And Utilisation Data (Nos.) 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Total headcount 199,763 200,364 198,553 198,440 201,691 204,107 209,905 Gross Additions 9,120 9,130 8,645 10,514 12,622 12,329 17,709 Lateral Additions 4,000 3,967 NA NA NA NA NA Net Additions (66) 601 (1,811) (113) 3,251 2,416 5,798 Quarterly Annualised Attrition (%) 14.9 13.5 16.9 17.2 15.8 16.6 20.6 Utilisation Including Trainees (%) 77.8 78.2 80.2 81.8 82.1 80.8 81.5 Utilisation Excluding Trainees (%) 81.9 82.0 84.0 84.7 84.9 84.7 85.7 Source: Company, HDFC Sec Inst Research Key Assumptions Particulars FY14 FY15 FY16 FY17 FY18 FY19E FY20E Volume Growth (%) 10.5 9.3 14.5 10.2 6.0 8.1 8.2 Pricing Change (%) 1.2 (2.8) (4.7) (2.7) 1.5 (0.8) (0.4) USD Revenue Growth (%) 11.6 5.6 9.1 7.4 7.2 7.7 9.6 USD/INR Rate 60.75 61.18 65.69 67.09 64.47 67.52 67.50 EBIT Margin (%) 24.0 25.9 25.0 24.7 24.3 24.2 24.3 Source: Company, HDFC Sec Inst Research

Attrition increased to 20.6% (partly seasonality factor) Utilisation was at all-time high of 85.7% in 1Q Net addition of 5,798 employees was the strongest in last eleven quarters supported by highest-ever gross additions at 17,709 in 1Q (44,110 gross adds in FY18)

INFOSYS: RESULTS REVIEW 1QFY19

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Change In Estimates

Particulars Earlier estimates FY19E

Revised estimates FY19E % change

Revenue (USD mn) 11,744 11,786 0.4 Revenue (Rsbn) 791.27 795.77 0.6 EBIT (Rsbn) 194.81 192.83 (1.0) EBIT margin (%) 24.6 24.2 (39)bps EPS (Rs) 72.3 72.2 (0.2)

FY20E FY20E % change Revenue (USD mn) 12,861 12,923 0.5 Revenue (Rsbn) 868.12 872.27 0.5 EBIT (Rsbn) 216.46 212.02 (2.1) EBIT margin (%) 24.9 24.3 (63)bps EPS (Rs) 79.4 78.5 (1.1) Source: HDFC sec Inst Research Peer Set Comparison

Company Mcap (Rs bn)

CMP (Rs) Reco. TP

(Rs) EPS (Rs) P/E (x) RoE (%)

FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E FY17 FY18 FY19E FY20E TCS 7,434 1,981 BUY 2,130 66.7 67.5 79.5 88.8 29.7 29.4 24.9 22.3 33.4 30.1 35.5 37.6 Infosys 2,863 1,317 BUY 1,415 66.0 67.7 72.2 78.5 20.5 19.5 18.2 16.8 22.0 24.5 24.1 25.7 Wipro 1,270 281 NEU 280 18.8 17.7 19.3 21.5 15.0 15.9 14.5 13.0 16.4 16.5 17.1 17.1 HCL Tech 1,369 983 BUY 1,160 57.6 62.7 71.2 77.5 17.1 15.7 13.8 12.7 27.0 25.3 25.5 24.7 TechM 571 641 BUY 780 31.6 42.7 45.9 51.8 20.3 15.0 14.0 12.4 18.1 21.5 20.3 20.2 Source: HDFC sec Inst Research

INFOSYS: RESULTS REVIEW 1QFY19

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Consolidated Income Statement YE March (Rs bn) FY16 FY17 FY18 FY19E FY20E Net Revenues (USD mn) 9,501 10,208 10,939 11,786 12,923 Growth (%) 9.1 7.4 7.2 7.7 9.6 Net Revenues 624.41 684.85 705.22 795.77 872.27 Growth (%) 17.1 9.7 3.0 12.8 9.6 Employee Expenses 376.39 415.50 432.69 488.66 534.60 SG&A and Other Operating Exp 77.23 83.30 82.43 94.37 102.01 EBIDTA 170.79 186.05 190.10 212.74 235.66 EBIDTA (%) 27.4 27.2 27.0 26.7 27.0 EBIDTA Growth (%) 14.6 8.9 2.2 11.9 10.8 Depreciation 14.59 17.03 18.62 19.91 23.64 EBIT 156.20 169.02 171.48 192.83 212.02 Other Income 31.22 30.49 34.86 22.37 24.13 PBT 187.42 199.51 206.34 215.20 236.16 Tax (incl deferred) 52.51 55.98 42.42 60.09 65.32 RPAT 134.91 143.53 163.92 155.11 170.84 E/o (adj for tax) 0.01 - 16.58 (1.95) - APAT 134.90 143.53 147.34 157.07 170.84 APAT Growth (%) 9.4 6.4 2.7 6.6 8.8 EPS 62.0 66.0 67.7 72.2 78.5 EPS Growth (%) 9.4 6.4 2.7 6.6 8.8 Source: Company, HDFC sec Inst Research

Consolidated Balance Sheet YE March (Rs bn) FY16 FY17 FY18 FY19E FY20E SOURCES OF FUNDS Share Capital - Equity 11.44 11.44 10.88 10.88 10.88 Reserves 606.35 678.38 638.36 627.89 677.61 Total Shareholders' Funds 617.79 689.82 649.24 638.77 688.49 Net Deferred Taxes (2.80) (3.33) (7.41) (7.95) (7.95) Long Term Provisions & Others 1.15 1.53 3.20 3.78 3.78 TOTAL SOURCES OF FUNDS 616.14 688.02 645.03 634.60 684.32 APPLICATION OF FUNDS Net Block 86.37 97.51 101.16 107.16 115.01 CWIP 18.93 19.65 20.27 22.93 26.15 Goodwill & Other Intangible Assets 47.49 44.28 24.58 35.12 36.23 LT Loans & Advances, Others 59.65 65.84 82.34 77.44 78.28 Total Non Current Assets 212.44 227.28 228.35 242.65 255.67 Debtors 113.30 123.22 131.42 157.94 167.07 Cash & Equivalents 346.86 389.77 319.81 284.12 317.65 Other Current Assets 75.93 87.88 106.50 98.47 105.31 Total Current Assets 536.09 600.87 557.73 540.53 590.03 Creditors 3.86 3.67 6.94 7.68 8.35 Other Current Liabilities & Provns 128.53 136.46 134.11 140.90 153.03 Total Current Liabilities 132.39 140.13 141.05 148.58 161.39 Net Current Assets 403.70 460.74 416.68 391.95 428.65 TOTAL APPLICATION OF FUNDS 616.14 688.02 645.03 634.60 684.32 Source: Company, HDFC sec Inst Research

INFOSYS: RESULTS REVIEW 1QFY19

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Consolidated Cash Flow YE March (Rs bn) FY16 FY17 FY18 FY19E FY20E Reported PBT 187.42 199.51 206.34 215.20 236.16 Non-operating & EO items (14.72) (6.34) (18.91) 4.94 (0.84) Interest expenses - - - - - Depreciation 14.59 17.03 18.62 19.91 23.64 Working Capital Change (11.12) (14.13) (25.90) (10.96) (3.16) Tax paid (52.51) (55.98) (42.42) (60.09) (65.32) OPERATING CASH FLOW ( a ) 123.66 140.09 137.73 169.01 190.47 Capex (32.11) (26.80) (17.60) (39.12) (35.81) Free cash flow (FCF) 91.55 113.29 120.13 129.89 154.66 INVESTING CASH FLOW ( b ) (38.84) (25.68) (3.19) (39.12) (35.81) FCFE 91.55 113.29 120.13 129.89 154.66 Share capital Issuance 0.00 - (0.56) - - Dividend/ Buyback (72.25) (68.95) (215.71) (108.51) (121.12) FINANCING CASH FLOW ( c ) (72.25) (68.95) (216.27) (108.51) (121.12) NET CASH FLOW (a+b+c) 12.57 45.46 (81.73) 21.38 33.53 Closing Cash & Equivalents 346.86 389.77 319.81 284.12 317.65 Source: Company, HDFC sec Inst Research

Key Ratios FY16 FY17 FY18 FY19E FY20E PROFITABILITY (%) EBITDA Margin 25.0 24.7 24.3 24.2 24.3 APAT Margin 21.6 21.0 23.2 19.5 19.6 RoE 23.2 22.0 24.5 24.1 25.7 RoIC or Core RoCE 43.2 37.9 36.6 35.2 36.9 RoCE 23.3 22.0 24.6 24.2 25.9 EFFICIENCY Tax Rate (%) 28.0 28.1 20.6 27.9 27.7 Fixed Asset Turnover (x) 3.6 3.4 3.2 3.2 3.1 Debtors (days) 66 66 68 72 70 Other Current assets (days) 44 47 55 45 44 Payables (days) 2 2 4 4 3 Other Current liabilities (days) 77 75 73 68 68 Cash Conversion Cycle (days) 31 36 47 46 43 Net Debt/EBITDA (x) (1.9) (1.2) (1.0) (0.7) (0.8) Net Debt/Equity (x) (0.5) (0.3) (0.3) (0.2) (0.3) Interest Coverage (x) N.A. N.A. N.A. N.A. N.A. PER SHARE DATA EPS (Rs/sh) 62.0 66.0 67.7 72.2 78.5 CEPS (Rs/sh) 65.4 70.2 79.9 76.6 85.1 DPS (Rs/sh) 24.3 25.8 33.5 43.0 48.0 BV (Rs/sh) 270.3 301.7 298.5 293.6 316.5 VALUATION P/E 21.2 20.0 19.5 18.2 16.8 P/BV 4.9 4.4 4.4 4.5 4.2 EV/EBITDA 14.7 13.3 13.4 12.1 10.8 OCF/EV (%) 4.9 5.7 5.4 6.5 7.5 FCF/EV (%) 3.6 4.6 4.7 5.0 6.1 FCFE/mkt cap (%) 3.2 4.0 4.2 4.5 5.4 Dividend Yield (%) 1.8 2.0 2.5 3.3 3.6

Source: Company, HDFC sec Inst Research

INFOSYS: RESULTS REVIEW 1QFY19

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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target 14-Jul-17 972 BUY 1,120

20-Aug-17 923 NEU 995 4-Oct-17 904 NEU 995

24-Oct-17 926 NEU 1,000 10-Jan-18 1,041 NEU 1,040 13-Jan-18 1,076 NEU 1,075 21-Feb-18 1,137 BUY 1,325 12-Apr-18 1,124 BUY 1,335 14-Apr-18 1,171 BUY 1,300 6-Jul-18 1,284 BUY 1,430

14-Jul-18 1,317 BUY 1,415

RECOMMENDATION HISTORY

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Disclosure: We, Apurva Prasad, MBA & Amit Chandra, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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