Why Infosys Is Confident On Demand Outlook Amid Weak Global Macro Trends

Infosys Ltd. reiterated its growth guidance and strong demand outlook amid concerns that global macro slowdown will hurt client spending.

The long-term growth outlook is intact as businesses will continue to spend on critical cloud-related services, Motilal Oswal said citing commentary by the management of India's second largest software services provider during an investor meet.

The company's optimism is in contrast with slower growth and margin pressure in quarter ended March. That comes when increase rates, commodity inflation and supply snarls are expected to slow down global growth.

Infosys, however, said that spending on cloud and digital is growing at three times the pace of the overall IT services market, according to Jefferies.

The IT firm intends to sharpen its focus on Europe as incremental tech there are expected to be on a par with that in the U.S. over the next five years, Prabhudas Lillaher.

Here's what brokerages that attended Infosys' analyst day have to say:

• The company reiterated FY23 dollar revenue growth guidance of 13-15% year-on-year

• Sees no slowdown in demand, despite weakness in the macro environment.

• Incorporating cost of living adjustment clauses in new agreements, and negotiating for an outcome/value-based pricing to improve pricing.

• Six levers for margin expansion are pyramid rationalisation (or having more employees in junior to mid-level roles), offshoring, optimising sub-contractor usage, automation, operating leverage, and improved pricing.

• Plans to expand on the digital front with opportunities around data analytics and AI, enterprise tech, engineering R&D services, IoT, cybersecurity, and experience.

• Q4 was muted but the company said demand remains intact and its order book is strong.

• Expect Infosys to deliver margin on the higher side of its guidance band, with strong growth and reduced dependence on sub-contractors as attrition falls.

• Security is a $100-billion market opportunity. Infosys has built zero-trust architecture and invested in seven defence centers to tap this opportunity.

• Verticalizing its cloud offerings with Cobalt suite for financial services.

• Based on revised estimates, the stock is currently trading at 21 times its estimated earnings per share for FY24.

• Value the stock at 28 times, implying a price target of Rs 2,000, implying a potential upside of 32.6% from current levels.

Jefferies

• The demand environment remains strong and spending on cloud/ digital is growing at three times the pace of the overall IT services market.

• Infosys is prioritising growth over margins to take advantage of the strong demand environment

• Digital and cloud market to grow at 14-16% CAGR over FY22-27 to $830-890 billion.

• Infosys has identified high potential accounts in the $10-50 million bucket which it wants to mine further by cross-selling more services

• Over FY22-25, expect the company to deliver 13% revenue CAGR and 14% EPS CAGR.

• Margin expected to fall to 22.5% over FY22-24E.

• EBIT margin at 22.5% in FY23E and 24% FY24-25E to be aided by better cost management

• Constant-currency revenue growth 16% estimated in FY23, followed by 11.5% and 10% in FY24-25E

• Maintain 'Buy.

Nirmal Bang

• Both FY23 revenue growth guidance of 13-15% in constant currency and the EBIT margin guidance of 21-23% were left untouched as expected.

• There is a likelihood of a downward revision in consensus revenue growth/earnings per share estimates for FY24.

• Predict mid-single-digit dollar revenue growth for Tier-1 IT companies while the street is building in double-digit growth, an assumption which is at risk.

• The 500- 700 basis-point growth gap in FY20 and FY21 was driven by portfolio mix, early mega-deal wins and early investments in digital services.

• Some of the new services like Metaverse and Web 3.0, while critical from a long-term perspective, may be looked up on as fluffy stuff over the next 6-18 months.

• Expect run-the-business spend to take slightly more prominence.

• 'Sell' rating with a target price of Rs 1,283, a potential downside from current levels.

• That target price values it at 19.5 times its 12-month forward earnings, 10% discount to TCS PE multiple.

Prabhudas Lilladher

• Near-term demand outlook remains strong amidst weak global macro trends.

• Sharpening focus in Europe as incremental tech spends in there expected to be on a par with that in the U.S. over the next five years.

• Digital and cloud services are expected to lead the growth with 14-16% CAGR over 2022-27E.

• Infosys has gained significant market share led by large deals (threefold growth in total contract value and 2.5 times growth in pipeline over FY18-22) and account expansion (18 clients added in $100-million account).

• Cobalt has evolved to be a key differentiator led by end-to-end cloud capabilities, strong partnerships with Hyperscalers and SaaS players and verticalised offerings

• Infosys is strengthening focus in continental Europe especially in Nordics, Germany, the U.K. and Switzerland.

• Infosys can maintain margins within guided range (21-23% for FY23) supported by pyramid optimisation, optimising subcontractor costs, increasing offshore mix, automation and operating efficiencies, value-based pricing and operating efficiencies.

• The brokerage estimates remain unchanged.

• It reduced the target price from Rs 1,899 to Rs 1,780, implying an upside of 18%.

• Reduced valuation to 26 times its earnings from 28 times, factoring risk of slowdown in tech spends in wake of challenging macro environment.