Infosys Q2FY18 results: Status quo; Retain REDUCE |

Infosys  (INFO)  reported  mixed  2QFY18  earnings  with  growth  (2.9%  vs.  3.6%  EE) modestly  below  EE  but  EBITM  coming  in  above  estimates  (24.2%  vs.  23.5%).  Growth was  broad-based  across  verticals  and  geos,  but  was  offset  by  India  weakness.

Consolidated  IT  services  revenue  growth  (3%  qoq)  was  driven  by  volumes  (1.6%  qoq; onsite/offshore  -0.7%/2.6%)  and  pricing  (1.4%  qoq;  onsite/offshore  1.9%/2.7%).

Management  commentary  suggests  instances  of  spending  cuts  in  FSI,  insourcing  and cost  optimisation  in  manufacturing,  and  furloghs  in  retail  customers  led  to  a  cut  in guidance. While we retain our pre-1Q FY18E US$ revenue growth estimate (6.8%), we raise  our  EPS  estimate  to  accommodate  2Q  margin  beat.  We  also  retain  REDUCE (Rs 938 TP, 14x Dec‟18 TTM EPS of Rs 67 vs. Rs. 919, 14x Sep‟18 TTM EPS of Rs 65.6) in absence of meaningful earnings triggers.

Retain REDUCE; buyback sole near-term trigger: Growth has moderated significantly relative  to  the  start  of  FY18  led  by  weakness  in  select  verticals,  client-specific challenges,  and  management  reorganisation.  Though  EBITM  beat  led  by  operational efficiency (utilisation improvement) leads to an increase in our EPS estimates, absence of meaningful triggers continues to influence our REDUCE rating.


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