Analyst Note| Julie Bhusal Sharma |
Narrow-moat Infosys reported second-quarter earnings in line with our expectations due to strong results all around. Infosys was the last of the big three Indian IT services to report earnings, joining Wipro in marking a quarter of solid results, though, in comparison, Tata Consultancy Services’ results were slightly softer than we expected. All three firms have been blessed and burdened with stellar digital transformation demand and high talent attrition rates over the last several quarters. While TCS reported that it had the industry-best attrition rate in the quarter at 12%, Infosys’ rates came closer to other peers’ rates, at 20% in the quarter--close to Accenture’s 19%. While attrition rates in the industry are at extreme highs, the consensus from reporting firms is that the worst is not yet behind us. We think attrition rates could stay at current levels or slightly higher over the next few quarters before easing. Nonetheless, the demand that can still be met with a current rotating door of talent for Infosys is encouraging, and the firm slightly raised its revenue outlook, which we think is achievable. We have increased our fair value estimate for Infosys to $14 per share from $11.90 after upgrading the company’s cost of equity to below average from average. The stock is up 4% after results to nearly $23 per share, leaving the stock overvalued, in our view.