On Thursday, Investec cut its rating on Infosys (NS:INFY) Ltd. (INFO:IN) (NYSE: INFY) stock from Hold to Sell, while increasing the price target to INR 1,720 from INR 1,540. This adjustment comes despite the firm's expectation that Infosys might raise its revenue growth guidance from 3-4% to 4-5%, due to deal backlog ramp-ups.
Investec's analysis suggests that Infosys could see a 5% and 9% growth in fiscal years 2025 and 2026, respectively. This projection is based on the assumption of consistent net new large wins of $2 billion per quarter, noting that the average over the past ten quarters has been $1.6 billion. Consequently, the firm has raised its earnings per share estimates for fiscal years 2025, 2026, and 2027 by 7.1%, 6.9%, and 4.9% to reflect anticipated margin improvements following a strong performance in the first quarter of fiscal year 2025.
Despite these positive adjustments, Investec's valuation model indicates that the current stock price may be overestimating future growth. A reverse discounted cash flow (DCF) analysis points to a 10% and 12% compound annual growth rate (CAGR) in USD/INR revenue until fiscal year 2035, with EBITDA margins expected to be 90 basis points higher from fiscal year 2027 to 2035 compared to the estimates for the first quarter of fiscal year 2025. The assumptions also include a cost of equity at 10% and a terminal growth rate of 4%.
The decision to downgrade was influenced by the belief that the stock's current price incorporates overly optimistic expectations for the long term. As a result, despite the higher price target, Investec advises a Sell position on Infosys shares. The valuation time frame has been extended from trailing twelve months (TTM) of the first quarter of fiscal year 2027 to the third quarter of fiscal year 2027.
In other recent news, Infosys, a global leader in digital services and consulting, has announced the extension of its strategic partnership with Posti, the primary postal and logistics service in the Nordics. This collaboration aims to enhance Posti's customer experience and operational efficiency using advanced AI technology and cloud capabilities, integrating Infosys Topaz, an AI-first platform, and Infosys Cobalt to drive service quality and operational efficiencies.
In addition to this partnership, Infosys has reported strong Q1 performance for FY'25, leading to a revision of its revenue growth guidance to 3-4%. The company's revenue grew by 3.6% sequentially and 2.5% year-over-year, with an operating margin guidance set at 20-22%. Infosys also secured 34 large deals with a total contract value of $4.1 billion.
Despite challenges in the retail sector due to the macroeconomic environment, Infosys continues to invest in strengthening its AI capabilities. The company's financial services segment saw a growth of 7.9%, and the impact of recent acquisitions on margins is expected to be minimal. However, Infosys remains cautious about the sustainability of recovery in the financial services sector, and discretionary business remains challenging. These recent developments highlight Infosys's commitment to driving digital transformation and improving service delivery in various sectors.
InvestingPro Insights
InvestingPro data and tips offer additional context to Investec's analysis of Infosys. The company's P/E ratio of 29.14 and PEG ratio of 4.22 suggest that the stock may indeed be trading at a premium, aligning with Investec's view that the current price might be overestimating future growth. This is further supported by an InvestingPro Tip indicating that Infosys is "Trading at a high P/E ratio relative to near-term earnings growth."
Despite the downgrade, Infosys shows some positive financial indicators. The company's revenue for the last twelve months stands at $18.66 billion, with a modest growth of 1.49%. Additionally, Infosys boasts a strong return on assets of 19.29%, indicating efficient use of its assets to generate profits.
An InvestingPro Tip highlights that Infosys "Has maintained dividend payments for 25 consecutive years," which may appeal to income-focused investors. The current dividend yield is 2.59%, with a significant dividend growth of 60.56% in the last twelve months.
It's worth noting that InvestingPro offers 13 additional tips for Infosys, providing a more comprehensive analysis for investors considering the stock in light of Investec's downgrade.
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