Q4 Momentum and AI Leadership Fuel Optimism by Investing.com

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In a recent series of investor meetings in the US, Infosys' CFO and Financial Controller shared optimistic updates on the company's growth and future outlook. According to BofA, Infosys (NS:) is tracking well for the first quarter of FY24, thanks to the ramp-up of several large deals launched in March.

Despite the recent underperformance of other software and digital firms, Infosys management believes that their cautious assumptions regarding discretionary spending will protect them from additional pressure. However, with a focus on cost-cutting projects, the broader demand environment is conservative.

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Infosys is establishing itself as a leader in AI and generative AI services, earning top ratings from seven industry analysts. It is one of the first IT services companies globally to receive certification for its AI management systems, promoting responsible AI practices and regulatory compliance.

These credentials are expected to position Infosys as a key player in the expanding AI services market. Interestingly, Infosys has not seen deal pricing decline due to expected AI-driven productivity growth, and vendor pricing remains low despite wage inflation and foreign exchange trends.

BofA has set a price objective (PO) for Infosys at INR 1,785 (ADR: US$21.5), based on a target price-to-earnings (P/E) ratio of 25x for the 12 months ending March 2026. is on 10% lower than the sector leader's multiple, based on the average trade discount over the past three years. Compared to its historical performance, this target multiple represents a 10% premium over Infosys' five-year average forward P/E multiple.

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There is no doubt that this is an investment-grade stock as it has a financial health score of 4 out of 5 at InvestingPro, which is commendable. Not many stocks are worth this high score. The score is given after analyzing over 100 parameters on the fundamental front, making it a piece of cake for investors to know the financial strength of a company without delving deep into the financials.

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On the valuation front, the fair value feature is estimating a fair value of INR 1,538, indicating an upside potential of INR 2.4% to the CMP of INR 1,488.9. That's lower than BofA's estimate, but the bottom line is that the bots are working faster at the counter.

In fact, the average analyst target is also higher than CMP, at INR 1,590. So clearly, the stock is liked by many but the price difference is not enough to take the risk. So, it might be a better idea to wait for the dip to register.

Infosys aims to maintain its strong free cash flow (FCF) growth, which stood at a robust 14% year-on-year in FY24 to FY25. The company expects its FCF growth to continue driving revenue and profit growth, although it recognizes a 4%-5% lower FCF/sales ratio than peers. This is due to Infosys' accounting treatment for financial income from long-term investments.

Looking ahead, BofA expects revenue growth for Infosys in FY26, driven by increased spending by banks on regulatory technology and postponement of SAP upgrades to meet Basel III requirements. Given the stock's underperformance over the past two years, its valuation is highly sensitive to these growth prospects. The revenue outlook for FY25 is close to the floor, but Infosys is expected to benefit from rising AI-led demand.

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Read more: Unlocking investment potential through fair value

X (formerly, Twitter) – Aayush Khanna

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