Infosys Rating: Buy; Growth is likely to remain strong

Infosys’ stock has fallen 22% from peak due to margin pressures, concerns over macro and rising yields. We believe Infosys is well positioned to deliver 11/15% CAGR in revenue/EPS over FY23-25 as cloud adoption is still low, low US unemployment rates may spur offshoring and reappointment of CEO for another five years provides confidence in execution. We reiterate Buy with revised PT of Rs 1,830 based on 26x PE. Sharp derating on lower growth is the key risk.

Multiple levers for growth to remain strong: Infosys stock has corrected by 20% since March on the back of weak Q4 results as well as growing concerns on growth due to worsening macro. Even though Infosys’ revenue growth directionally follows US real GDP growth with a lag, the correlation has been low. Besides, we model a moderation in Infosys’ $ growth from 14% in FY23 to 10% in FY25 which is directionally in line with slower GDP growth. 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 US and potentially weaker economic environment should provide an impetus to outsourcing/offshoring, driving market share gains for Indian IT/Infosys.

5-7% downside risk to earnings in bear case: If macro materially worsens, its impact will likely be seen from H2FY23. Infosys’ revenue growth and margins in FY23 could be at the lower end of its guidance at 13% y-o-y and 21% respectively. Growth could moderate further to 9% levels in FY24-25. However margins could recover to 21.9% levels over next two years, as demand slowdown may reduce wage pressures. Infosys will also optimise utilisation and offshore mix to support margins. Besides, benefits from improvement in its employee pyramid will flow through in FY23 and FY24. In effect, this could result in 5-7% cut to our FY23-25 EPS estimates.

Improved execution under current CEO: Since the new team led by Salil Parekh took over, Infosys has become more growth focused and had strengthened its sales and delivery capabilities. This is evident from its higher growth (organic revenue growth of 10% over FY19-22 vs 8% over FY14-19) – the fastest among large Indian IT peers, improved free cash flow conversion (97% over FY19-22 vs 75% over FY14-19) and consistency in execution. The reappointment of CEO for five years instills greater confidence over execution in the future.

Reiterate Buy: Infosys trades at 25x which is higher than its historical average (18x). We believe this is justified given its superior growth outlook (earnings growth of 15% over FY23-25 vs. 8% over FY14-19), consistent execution under current CEO and higher payout ratios. We lower margin estimates by 20-40bps to factor in Infosys’ growth focus and expect Infosys to deliver 11/15% revenue/EPS CAGR over FY23-25. We maintain Buy with a revised PT of Rs 1,830 based on 26x PE to factor in higher yields. In our bear case (9%/14% FY23-25 revenue/EPS CAGR), Infosys multiples could derate to 20x implying bear case PT of Rs 1,310 and 15% downside.

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