Infosys is a leading provider of IT services and solutions in India, ranking second in terms of revenues. As of Dec 2022, the company had a large client base of 1,850 and employs a workforce of over 346,000 individuals, serving clients in over 50 countries. They specialize in offshore-centric consulting and IT services, utilizing a global delivery model to offer solutions both on-site at client locations and from their own offshore facilities, primarily in India. The company provides a wide range of services, including consulting services, business application services, technology services and outsourcing services.
Investment Overview
Digital projects’ robust growth driven by cloud service. Infosys (INFY) is the second largest player after Tata Consulting Services (TCS), among the top-4 Indian IT firms (TCS, Infosys, HCL and Wipro). INFY's digital segment has experienced strong growth, driven by increasing demand for cloud services. The digital segment has grown at a CAGR of 38% over FY18-FY23 (Mar YE). Revenue contribution from the digital segment has also increased, rising from 25.5% in FY18 to 62% in FY23. Cloud services have played a crucial role, accounting for over one-third of the digital segment's revenue. INFY's Cobalt, a suite of service solutions and platforms encompassing cloud computing, artificial intelligence, automation, digital experience, and cybersecurity, has been instrumental in accelerating enterprises' cloud journey. The company's early investments in Cobalt have facilitated its growth.
Rising global market share of INFY as outsourcing and offshoring pickup. As companies prioritize cost reduction, the trend of outsourcing and offshoring is likely to rise, similar to what was observed during previous economic downturns. INFY has significantly expanded its global market share in IT services over the past decade, going from 0.8% in 2012 to 1.5% in 2022. This growth is expected to continue, as INFY has a proven track record of effective execution and cost management. INFY had the highest ever large deal total contract value (TCV) of US$17.7bn in FY24. Rising deal sizes and cost focus will drive vendor consolidation which favors large IT firms like INFY in the long-term.
INFY's long-term growth remains resilient despite near term recessionary impact on IT budgets. Fear of a recession in the US, is leading to increased scrutiny of tech budgets in 2024, with a shift in focus from growth to cost-saving. In 4Q24, INFY guided FY25F revenue growth of 1-3%. Street expects INFY FY24F revenue growth of 5% (vs 5.2% in FY24), while projecting revenue growth for the top four Indian IT firms at 6.7% in FY25F (vs 5.4% in FY24). Despite facing macroeconomic pressures, INFY’s strong improving execution, and deep client relationships, which includes over 180 Fortune 500 companies, are expected to remain strong, leading to growth resilience. INFY anticipates that its AI-first set of services, solutions, and platforms called Topaz, which harness generative AI technologies, will contribute significantly to revenue growth in the forthcoming years.
BUY INFY with a lower TP of US$19.5 (prev US$22.7), based on 12m-forward peer P/E of 25x. Our TP for INFY is based on 25x (previous 28x) 12-month forward P/E on a blended net profit of US$3.2bn (previous US3.3bn). Lower TP is due to (i) consensus downward revision in FY25 net profit by 5% and (i) the decline in target PE from 28x to 25x. INFY’s closest competitors currently exhibit higher earnings and revenue CAGR of 12% and 8% respectively, over FY24-26F (Mar YE), compared to INFY’s CAGR of 6% and 7% over the same period. In considering the currently trading 12m forward P/E multiple of INFY’s closest competitors, we argue that INFY should trade at a similar multiple to its peers, as it is one of the largest IT players well-positioned to benefit from the growth of digital transformation and cloud computing.
Risks
Dependence on a small number of key clients: Infosys derives 34% of its revenue from its top 25 clients and merely 4% are among the US$50mn+ category, which increases the company's risk of revenue loss if one of these clients decide to stop doing business with the company.
High attrition rate. The company's attrition rate has been a concern in recent years and has generally been higher than the industry average.
Topic
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