In a series of recent investor meetings in the US, Infosys' CFO and Controller shared upbeat updates on the company's progress and future prospects. According to Bank of America, Infosys (NS:) is going well through 1QFY24, thanks to the ramp-up of several key deals that started in March.
Despite the recent disappointing performance from software companies and other digital companies, Infosys management believes its cautious assumptions on discretionary spending will protect it from additional pressures. However, the broader demand environment remains conservative, with a focus on cost-cutting projects.
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Infosys is establishing itself as a leader in AI and generative AI services, receiving top ratings from seven industry analysts. It is one of the first IT services companies globally to receive certification for its AI management systems, which promote responsible AI practices and regulatory compliance.
These credentials are expected to position Infosys as an important player in the expanding artificial intelligence services market. Interestingly, Infosys has not observed a decline in deal prices due to expected AI-led productivity gains, and vendor pricing aggression remains low despite wage inflation and foreign exchange trends.
Bank of America has set a price target (PO) for Infosys at INR 1,785 (ADR: $21.5), based on a target price-to-earnings (P/E) ratio of 25 times for the 12 months ending March 2026. This target revolves around 10% lower than the sector leader's multiple, in line with the average trading discount over the past three years. Compared to its historical performance, this target multiple represents a 10% premium over Infosys' five-year average forward price-to-earnings multiple.
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There is no doubt that it is an investment-grade stock as its InvestingPro financial health score is 4 out of 5, which is commendable. Not many stocks are able to achieve this high. This result is obtained after analyzing more than 100 parameters on the fundamental front, which makes it easier for investors to know the financial strength of the company without having to delve deeply into the financial stability.
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On the valuation front, the fair value feature estimates a favorable price of INR 1,538.9, showing upside potential of 2.4% from the CMP of INR 1,488.9. This is lower than what Bank of America estimates, but the main takeaway is that the robots are bullish on the counter.
In fact, the average analyst target is also higher than CMP, at INR 1,590. The stock is clearly loved by many but the valuation gap is not enough to take the risk. Therefore, waiting for a decline to enter may be a better idea.
Infosys aims to maintain its strong free cash flow (FCF) growth, which stood at 14% YoY in FY24, through FY25. The company expects FCF growth to continue to outpace revenue and earnings growth, although it It recognizes a lower free cash flow to sales ratio of 4% to 5% compared to its peers. This is due to the accounting treatment followed by Infosys for financial income from long-term investments.
Looking ahead, Bank of America expects Infosys' revenue growth to rebound in FY2026, driven by increased regtech spending by banks to meet Basel III requirements and postponed SAP upgrades. Given the stock's poor performance over the past two years, its valuation is highly sensitive to these growth prospects. Earnings forecast for FY25 is close to the low end, but Infosys is expected to benefit from rising AI-led demand.
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X (formerly Twitter) – Aayush Khanna