Infosys: Old But Still Gold

Company Name INFY

Current Market Price Rs 1,563

Calendar Year Return 2.54%

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In the IT sector, we are focusing on businesses which have healthy growth characteristics, with an ability to cater to both discretionary spending and cost take-out programs and trade at reasonable valuations. Notably, Infosys meets the bill on all counts.

Investing Rationale

Large Deals: In H1FY24, Infosys won a fair share of large deals to provide some visibility for FY25 growth, though the sector faced a tough situation in 2023.

The IT services firms faced a tough demand environment in the year due to several factors. Primarily among them were reluctance to commit to new programs given high economic uncertainty, reprioritisation of spending away from Covid-era priorities toward efficiencies and optimisation, excess in-house hiring, and longer sales and ramp-up cycle in mega deals.

Revenue: These headwinds resulted in muted revenue growth of 2-5 per cent for large companies and 6-14 per cent for mid-tier names. But now these headwinds have bottomed out and will incrementally aid demand and revenue growth in FY25. Our base case already factors these tailwinds and a soft landing for the US economy.

The intent to invest in tech continues across all sectors with a focus on digitalisation, automation, back-end systems and (artificial investment) initiatives. We expect core modernisation leveraging a host of digital technologies to be a priority area of investment for the next several years.

Another interesting thing to note is that despite multiple quarters of disappointment, the glimmer of hope for improvement has not reduced in the sector.

Growth Potential: We expect Infosys growth to normalise to 9.1 per cent in FY25 from 2 per cent  in FY24.

Hence, Infosys remains our top pick among IT services companies under coverage. We expect earnings per share (EPS) to grow by 15.6 per cent year-on-year (y-o-y) in FY25 and 13.1 per cent y-o-y in FY26 and are recommending a buy on Infosys with a target price of Rs 1,870.

Recommended by: Shrikant Chouhan, Executive Vice President and Head of Equity Research Kotak Securities