Shares of Infosys Ltd. declined in early trade even as Jefferies said the IT firm is well positioned for growth as cloud adoption is still low, a decline in U.S. unemployment rates may spur offshoring, and reappointment of CEO for another five years provides confidence in execution.
“With cloud adoption still at sub-40% levels, the current tech spending cycle has more legs in store. Moreover, multi-year low unemployment in the U.S. and potentially weaker economic environment should provide an impetus to outsourcing offshoring, which in turn should drive market share gains for Infosys and Indian IT firms,” the research house said in a June 5 report.
Also, Infosys' new team under Chief Executive Officer Salil Parekh has made the company “more growth-focused and strengthened its sales and delivery capabilities”.
“The impact of management initiatives is evident from its higher organic revenue growth of 10% over FY19-22 versus 8% over FY14-19—the fastest among large Indian IT peers—improved free cash flow conversion and consistency in execution. The reappointment of CEO for another five years instills greater confidence over Infosys execution in future.”
Jefferies maintained its ‘buy' call on the IT stock. But it cut target price from Rs 2,050 to Rs 1,830—implying a potential upside of 20% against 36% earlier.
Despite falling 22% from its peak due to margin pressures, concerns over macro factors and rising yields, Infosys trades at 25 times its earnings, higher than its historical average, the report said. “This is justified given its superior growth outlook, consistent execution under current CEO and higher payout ratios.”
Jefferies also said Infosys' strategic repositioning toward digital capabilities places it well to drive strong client engagement. “Margins are expected to decline to 21.5% in FY23 but expand gradually over FY24/25.” It sees the company's revenue and EPS to grow at an annualised rate of 11 and 15%, respectively, over FY23-25.
The risks to Jefferies' call:
Weaker revenue growth
Lower margin
Unfavourable currency
Corporate action
According to the financial services provider, a potential “sharp derating on lower growth” is the key risk to its target price on the company.
Shares of Infosys declined as much as 1.7% compared to a 0.7% drop in NSE Nifty 50 around 9:30 a.m. on Monday. Of the 48 analysts tracking the company, 39 maintain a ‘buy', five suggest a ‘hold' and four recommend a ‘sell', according to Bloomberg data. The average of the 12-month consensus price target implies an upside of 28.6%.
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