INFO posted 6.3% q/q growth in CC (19.4% yoy), ahead of our estimate of 5.7%, on the back of a broad based performance. US dollar revenue grew 5.7% q/q (4.9% estimate) and 20.7% yoy in Q2 FY22. In terms of INR, Ebit/PAT grew 12% yoy. The growth was due to outperformance in Manufacturing (+42.5% YoY CC), BFSI (+20.5%), Retail (+17.2%), and Life Sciences (+26.1%). The US grew 23.1% year-over-year in CC, Europe increased 19.6%, and RoW increased only 4.7%.
TCV’s big deal of $2.15 billion was minor (new net 37%). However, management indicated good traction in medium and small sized deals, and emphasized that the pipeline remains strong in light of strong demand. Ebit margin decreased 10 basis points q/q to 23.6%, above our estimate of 22.3%, despite the impact of higher subcontracting expenses and wage increases in Q2 FY22. Usage (+70 basis points) remains quarter) and the external mix (+50 basis points) extended, despite strong hiring (11.7 thousand basis points, up 4.4%) in Q2 FY22.
We were positively surprised by the increase in INFO’s fiscal year 22 US dollar revenue growth guidance to 16.5-17.5% annually (from 14-16%), an increase of 200 basis points in the mid-point versus our expectations of a 100 basis point rise. We continue to see room for profit and upside over the next two quarters as you benefit from a better focus on the big deal and demand tailwinds. Strong underlying growth (estimated +19% y/y) should allow INFO to maintain Ebit margin impact (due to supply side challenges) within a narrow range at the upper end of its guidance (held at 22-24%). Apart from operating leverage, it should also benefit from further flattening of the pyramid and ongoing operating efficiency measures in FY23.
We see a sharp increase in attrition (20.1% in Q2FY22, up 620 basis points qoq) on the matter, especially since utilization has been at a record high of 89.2%, which is unsustainable. This remains a controllable key.
Evaluation and Presentation: We expect the company to deliver highest quarterly growth performance in FY22e on the back of strong capabilities and increased earnings for large deals in FY21. We increased our EPS estimate for FY22e by 2% thanks to stronger-than-expected performance in the second quarter. We continue to see INFO as a key beneficiary of accelerating IT spending, given its capabilities around cloud and digital transformation.
Our relative preference for INFO over TCS is based on its height to maximize growth potential. Since INFO outperformed TCS in FY21 and in the first half of FY22, we don’t expect any valuation difference between the two companies. Based on our revised estimates, the stock is currently trading at 26 times FY 23e EPS. We value the stock at 30x FY23e EPS, which implies a TP of Rs 1,960. We repeat the purchase evaluation.