Motilal Oswal had argued earlier that the IT sector’s re-rating depends on a new AI services cycle emerging, and this is largely a waiting game until the AI capex cycle moderates, but believes the wait may now be ending. . Similar to the cloud build-out phase from 2016 to 2018, the store, compute and infra layer are now in place; and while capex may still continue, the brokerage expects incremental spends on AI and services to pick up.
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Motilal Oswal Repo
We note that IT services' share in Nifty profits has been stable at 15% for the past four years, whereas its weight in the benchmark index is now at a decadal low of 10% (vs 19% peak in Dec’21).
This presents an enticing opportunity: Our analysis suggests outsized gains if this plays out, whereas the current levels already bake in the status quo (GenAI-led deflation, demand apathy).
We upgrade our growth estimates to factor in a growth recovery, which will start reflecting in H2 FY27, taking full shape in FY28 as enterprises enter full-scale AI deployment.
We thus roll over our target prices to FY28E EPS, and upgrade target multiples by ~20%.
We upgrade Infosys to Buy, as we believe its Topaz suite of AI services and fullstack app services capabilities will be back in vogue.
We believe Infosys will be a key beneficiary of enterprise-wide AI spends, and at the current valuations, we believe upside risks outweigh downside risks. Accordingly, we upgrade Infosys to Buy from Neutral.
We have raised our FY27/FY28 EPS estimates by 2.9%/8.5%. Infosys is now expected to deliver 5.5%/8.6% YoY CC growth in FY27/FY28, supported by a demand recovery from H2 FY27 and further acceleration in FY28. We expect Infosys to report Ebit margins of 20.9%/21.0% in FY27/FY28, remaining within the guided range.
We also upgrade our target multiple by ~20% and roll forward our valuation to FY28E EPS. Our target price of Rs 2,150 (39% upside) is based on 26x FY28E EPS (earlier 22x Jun’27E EPS).
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