Infosys shares have plunged 25 per cent so far this year amid, underperforming benchmark Nifty 50 which has tumbled 12%. Despite the steep correction in the stock, it has managed to outperform Nifty IT which has plummeted 29% so far this year. Domestic brokerage firm Sharekhan remains bullish on the stock and sees up to 20% potential rally going forward. “Infosys is well positioned to capture opportunities even in case of increased focus on cost efficiencies by enterprise clients to reduce costs in a deteriorating macro environment. We expect Infosys to continue to deliver industry-leading organic revenue growth among large peers in FY2023E,” the brokerage report said.
Company well placed to sustain strong growth momentum in coming years
According to Sharekhan analysts, Infosys’ spends on cloud-transformation initiatives continue to catalyse digital transformation. The company’s Cobalt cloud capabilities are market‑leading across the cloud computing services model. Further, it continues to build its data, analytics, AI, cybersecurity, and IoT expertise and invest in strong partnerships with cloud hyperscalers including AWS, GCP and Microsoft Azure, and SaaS providers. “The company’s differentiated cloud capabilities helped it to outpace the market growth rate in FY2022 and is well placed to sustain the strong growth momentum in the coming years,” they said.
First half of FY23 likely to be stronger
The company remains confident of delivering strong revenue growth of 13-15% in constant currency in FY2023E with front-ended revenue growth, the Sharekhan report said. “Hence, H1FY2023 is expected to be stronger in terms of growth compared to H2FY2023. Infosys can benefit from cost takeout initiatives of customers in a deteriorating macro environment,” it said.
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Margins likely to improve in second half of FY23
According to the analysts, Infosys’ margins are expected to remain under pressure in the first half of FY23, owing to higher-than-usual wage revision (effective April), supply side issues, increasing travel and facility expenses, and investments in building capabilities. Though strong addition of freshers during FY2022 would reduce subcontractor costs, it will be back-ended. “Margins are likely to improve in 2HFY2023 as headwinds are front-loaded, led by rationalisation of sub-contractor costs, pyramid rationalisation, and better pricing. The company expects gradual improvement of pricing in FY2023 as it is invoking cost of living adjustments (COLA) and negotiating higher pricing during renewals,” they said.
Infosys stock rating: Buy
Target price: Rs 1,730, Upside: 20%
Sharekhan maintains buy call on Infosys shares with a target price of Rs 1,730. It, however, lowered out target multiples considering higher interest rates and possibilities of US recession. The brokerage reduced its earnings estimates for FY23-25E by 1-3% to factor in moderation in USD revenue growth owing to adverse currency movements and anticipation of moderation in technology spending due to increasing macro concerns. However, analysts believe that Infosys is well equipped to deliver industry-leading organic growth among large peers in FY23, FY24, given proven capabilities to execute largescale complex transformation programs.
It is expected to report USD revenue and earnings growth of 12.7% and 12.3%, respectively, over FY2022-FY2024E. “We continue to like Infosys because of its robust capabilities, a strong capital-allocation policy, stability of the current leadership, and a strong portfolio of business, which are aligned in growth areas. Hence, we maintain our Buy rating on the stock with a revised price target (PT) of Rs 1,730,” they said.
Key upside risks
Rupee appreciation and/or adverse cross-currency movements, slackening pace in deal closures, and/or constraints in local talent supply in the US would affect earnings remain the key risks to the upside.
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