At a recent series of investor meetings in the US, Infosys’ CFO and controller shared upbeat news about the company’s progress and future prospects. According to BofA, Infosys (NS:) is performing well in the first quarter of FY24 due to the acceleration of several large transactions initiated in March.
Despite recent disappointing results from other software and digital technology companies, Infosys management believes its cautious discretionary spending assumptions will protect it from additional pressure. However, the broader demand environment remains conservative with a focus on cost-cutting projects.
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Infosys has established itself as a leader in artificial intelligence and generative AI services, receiving top ratings from seven industry analysts. It is one of the first IT services companies in the world to achieve certification of its AI governance systems, which promote responsible use of AI and compliance with regulatory requirements.
These credentials are expected to make Infosys a significant player in the expanding market for artificial intelligence services. Interestingly, Infosys has not seen deal prices fall due to expected productivity gains from AI, and vendor pricing aggressiveness remains low despite wage inflation and currency trends.
BofA 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 25x for the 12 months ending March 2026. This target is about 10% below the sector leader’s multiple, which is in line with the average trading discount over the last three years. Compared to historical performance, this target multiple represents a 10% premium to Infosys’ five-year average forward P/E ratio.
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There’s no doubt that this is an investment grade stock, as its Financial Strength Score on InvestingPro is 4 out of 5, which is commendable. Few stocks can achieve such a high score. This score is assigned after analyzing more than 100 fundamental parameters, making it easy for investors to know the financial strength of a company without even diving into the financials.
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On the valuation side, the fair value function estimates the corresponding price at INR 1,538, reflecting an upside potential of 2.4% from a CMP of INR 1,488.9. This is lower than BofA estimates, but the key takeaway is that the bot is optimistic.
In fact, the average analyst target is also higher than CMP at INR 1,590. It’s clear that many people like the stock, but the valuation gap isn’t enough to warrant a risk. Therefore, it is better to wait for the fall to make an entry.
Infosys aims to maintain strong free cash flow (FCF) growth, which stood at 14% y-o-y in FY24, into FY25. The company expects its free cash flow growth to continue to outpace revenue and profit growth, although it acknowledges that its free cash flow to sales ratio is 4% to 5% lower than its peers. This is due to Infosys’ approach to accounting for financial returns on long-term investments.
Looking ahead, BofA expects Infosys’ earnings growth to rebound in FY26, driven by banks’ increased spending on regulatory technology to meet Basel III requirements and delayed SAP upgrades. Given the stock’s poor performance over the past two years, its valuation is very sensitive to these growth prospects. Earnings guidance for FY25 is close to the bottom, but Infosys is expected to benefit from rising demand for AI.
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X (formerly Twitter) – Aayush Khanna