Infosys shares have up to 28% upside potential; most attractive risk-reward in IT space, say analysts

The June quarter results of IT major Infosys are likely to be weak, but that is largely known to the Street. Analysts tracking the stock said headwinds for Infosys are largely priced in and that the stock has most attractive risk-reward in the IT space.

Infosys is trading at a valuation of 19.6 times one-year forward earnings per share, closer to its last 15-year average multiple of 19 times. ICICI Securities said soft revenue growth in FY24 is already factored in the current stock price, and announcement of mega deal wins will potentially help the stock re-rate from these levels.

"Infosys has already announced 4-5 deal wins in the current quarter (Q1FY24) and has good mega deal pipeline with some deals in advanced stages. We believe risk-reward ratio is favourable with limited downside (8-9 per cent) for Infosys from current levels in a bear case scenario of 8-9 per cent YoY CC revenue growth in FY25E and FY26E," it said in its analysis of Infosys annual report.

Shares of Infosys rose 1.64 per cent to a high of Rs 1,286.70 on BSE. ICICI Securities continued to value Infosys at 23 times on FY26 EPS of Rs 80 to arrive at an unchanged target price of Rs 1,641, implying 28 per cent potential upside. The domestic brokerage said Infosys has the most attractive risk-reward in the IT space.

Infosys' discretionary business has been adversely impacted by the macroeconomic slowdown over the last few months and that the delayed decision-making and higher deal scrutiny will have a direct impact on the deal conversion, said Motilal Oswal Securities. This brokerage sees FY24 revenue growth for Infosys at 5.2 per cent YoY in constant currency (CC) terms, which falls under the lower end of the guidance range.

"Despite near-term weakness, we expect Infosys to be a key beneficiary of acceleration in IT spends in the medium/long term. The stock is currently trading at 18 times FY25E EPS. We value the stock at 21 times FY25E EPS, implying a target price of Rs 1,520," it said.

The average price target on Infosys stock at Rs 1,500 suggests a 17 per cent potential upside.

Meanwhile, JM Financial said the probability of Infosys reporting another quarter of sequential decline is not insignificant. Infosys’ March quarter miss was attributable largely to project cancellations in March alone.

"Two months of incremental impact means Infosys’ starting point for 1QFY24 is a revenue deficit of $180mn. Even adjusting for seasonal strengths – higher working days, new project starts, Infosys may not be able to recoup this deficit entirely. We are therefore building a 1 per cent QoQ decline. Most revenue guidance available currently for 1QFY24 - Wipro, Cognizant, EPAM, DAVA - are pointing to a sequential decline anyways," said JM Financial.

"A weak start also means CQGR needed in 2H to achieve 4-7 per cent cc revenue growth guidance will rise to 5-9 per cent. Infosys will need a few mega deals to achieve even the lower end of its guidance range, in our view. We assume a healthy pick-up in an otherwise seasonally weak 2H (4 per cent CQGR) as we build impact of mega deals (not won yet)," it said. This brokerage has a lower target of Rs 1,360 on the stock.

Also read: Go Fashion shares plunge 5% amid heavy turnover; Sequoia Capital likely seller

Also read: Glenmark Life Sciences shares hit Rs 600 level on reports Nirma, others in race to buy API maker