FY23 proved to be the year of volatility and uncertainty for demand across the world. Despite this uncertainty and volatility, Infosys, the country's second-largest IT services exporter (in terms of revenues), performed well and demonstrated its resilient engagement with its clients as well as its commitment to customer-centricity, said brokerage firm Axis Securities.
In FY23, the company delivered industry-leading revenue growth of 15.4%. The order book signed every quarter in FY23 was higher than the corresponding quarter of the prior year. Infosys closed the year with an all-time high annual TCV of $9.8 billion and sustained momentum in large deal wins in FY23 as well.
Looking ahead, the brokerage anticipates that Infosys may witness near-term macroeconomic challenges that could impact its revenue growth momentum. It points out that some of the world's largest economies are currently experiencing economic downturns, partly due to rising interest rates.
After the collapse of SVB and Credit Suisse, many companies have become cautious about IT spending. The European region showed some strength but is likely to remain under pressure going forward. Due to unfavourable economic conditions, many companies are delaying cloud migrations, digital transformation, etc. For this reason, the demand scenario has changed, and decisions are being postponed, said the brokerage firm.
Nonetheless, numerous engagements in cloud migration, application modernization, and data modernization activities have been observed. As a precursor to core transformation and cloud migration, many customers are reviewing their current operations in search of optimization opportunities and freeing up resources to support their core transformation.
Demand for digital services improves, but near-term challenges persist
According to Axis Securities, demand for services around remote connectivity, cybersecurity, collaboration tools, digitized processes, automation, and cloud adoption has increasingly strengthened during the year.
However, in the near term, Infosys sees challenges on the customer side due to adverse macroeconomic conditions. Decision-making is delayed in many industries, such as BFSI, retail, and Hi-tech, and these unfavourable conditions are likely to continue at least through the first half of FY24, it noted.
Robust demand for digital services in the long term
Uncertain macroeconomic conditions will lower short-term demand, but the brokerage said the long-term demand for automation will remain strong. It stated that Infosys has a strong focus on digital services and has deep expertise in delivering these services within defined verticals. Digital revenue as a percentage of total revenue has grown meaningfully from 14% in Q1FY17 to 62% in Q4FY23, reporting an impressive growth of 41.2% YoY.
Management sees healthy growth in demand for digital transformation and digital business, especially in industries such as BFSI, manufacturing, retail, and life sciences, where customers want customized development of newer technologies.
Against this backdrop, Infosys is targeting double-digit revenue growth overall in FY23. The company’s strategy is to focus on IP-enabled offerings, digital transformation, software-based offerings, and large enterprise accounts for its future growth, as per the brokerage.
Valuation
Given the uncertainties in the near term, the brokerage has recommended a 'sell' rating on Infosys and assigned a 20x P/E multiple to its FY25E earnings of ₹63.7 per share to arrive at a target price of ₹1,300 apiece, implying a downside of 14% from the stock's latest closing price of ₹1,512.
44 analysts polled by MintGenie on average have a 'hold' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.
