Infosys (INFY) beat our Q1-FY23 non-consensus estimates positively on revenue, while negatively on margin. Revenue growth in CC quarter-on-quarter terms at 5.5 per cent was higher than our 5 per cent estimate while 20.1 per cent EBIT margin was a shocker vs our 20.6 per cent estimate. Revenue performance was top-heavy, with 67 per cent of the incremental revenue (in USD terms) coming from top-10 clients who grew by 11 per cent quarter-on-quarter. The outperformance on the revenue front likely prompted an upward revision of the FY23 revenue growth guidance to 14-16 per cent (100-basis point increase). While the EBIT margin guidance of 21-23 per cent was maintained, it has now been indicated to come in at the lower end of the range. We have cut our EPS numbers for FY23/FY24 by 5 per cent/3 per cent.
This downgrade cycle will likely continue. More so for FY24, as revenue growth may come in lower than the current market expectations due to tighter IT spending by customers on a significantly-weaker corporate profit picture due to a likely mild recession in 2023 in the US. The weak Q1-FY23 margin was largely due to higher growth in compensation costs in the face of significant attrition (28.4 per cent).
INFY stated that the large deal pipeline is higher post Q1-FY23, compared to what it was three-six months ago. With its upped guidance, INFY seems to be gaining market share even in FY23 among its tier-1 Indian peers, but at a slower pace compared to FY22.
Also, the revenue guidance does not take into account potential deterioration in macro-economic conditions in key markets of the US and the EU, possibly towards Q4-FY23. Lead indicator picture is mixed. The large deal TCV at about $1.7 bn was down 35 per cent year-on-year and 26 per cent quarter-on-quarter. The net-new large-deal TCV was down 61 per cent year-on-year as at Q1-FY23.
The strong growth in FY22 was driven by net-new large-deal TCV before the year started. However, hiring, another lead indicator, was at close to the highest point. We continue to be concerned about the quality of the financials with unbilled revenue up 60 per cent year-on-year, while revenue was up about 24 per cent in INR terms.