Infosys surges 4% on signing a 5-year AI deal with $2 billion target spend

Infosys was trading at its highest level since March 2023. In the past four trading days, the stock has rallied 11 per cent after sector major TCS and HCL Tech released their Q1FY24 results

Shares of Infosys surged nearly 4 per cent to Rs 1,475.10 on the BSE in Tuesday’s intra-day trade after the company said it has entered into an agreement with one of its existing strategic clients to provide AI and automation led development, modernization and maintenance services. The total client target spend for the deal is estimated at $2 billion over the next 5 years.

Infosys was trading at its highest level since March 2023. In the past four trading days, the stock has rallied 11 per cent after sector major Tata Consultancy Services (TCS) and HCL Technologies announced their June quarter earnings.

Infosys unveiled its maiden AIfirst offering called Topaz in May, which merges cloud and data analytics capabilities. Strong deal flows will improve revenue visibility in the medium to long term, ICICI Securities said in a note.

Meanwhile, Infosys will announce results for the first quarter ended June 30, 2023 (Q1FY24) on Thursday, July 20, 2023 around 3.45 PM.

In the preceding quarter, Infosys guided for a revenue growth of 4-7 per cent in the financial year 2023-24 (FY24) while lowering its operating margin guidance band from 21-22 per cent to 20-22 per cent.

Discretionary business has been adversely impacted by the macroeconomic slowdown over the last few months. Despite Infosys’ cautious outlook on a few verticals such as communications and BFSI,  analysts at BOB Capital Markets believe, its strength in managing the twin journeys of digital transformation (Cobalt) and cost takeout will drive growth leadership.

The brokerage maintains a Buy rating and continues to value the stock at 20.5x FY25E EPS, translating to an unchanged target price (TP) of Rs 1,760.

A further rise in interest rates would be a key downside risk to our estimates as deal wins could soften due to longer client decision-making cycles, especially in the financial services, retail, hi-tech and telecom verticals, analysts at ICICI Securities said.

Infosys has already announced 4-5 deal wins in Q1FY24 and has good mega deal pipeline with some deals in advanced stages. Announcement of mega deal wins will potentially help the stock re-rate, they had said in the June update report.

The brokerage believes Infosys’ FY24 revenue guidance of 4-7 per cent YoY constant currency (CC) is healthy because CQGR of 2.3-2.9 per cent implied by mid to high end of the guidance is higher than Infosys’s pre-covid CQGR of 2.2 per cent. It is also higher than the CQGR implied by the guidance of larger peers like Accenture, Capgemini and TCS.

Barring the guidance miss in Q4FY23, Infosys has a good track record of upgrading or retaining the guidance over the course of the year and delivering near higher end of the guidance during Salil Parekh’s tenure.

Infosys has strong digital capabilities around SaaS and hyperscalars and is best placed to benefit from the revival in demand for digital technologies over FY25-26E. Demand is healthy for most SaaS players as they have either retained or slightly upgraded their CY23/FY24 guidance during Q4FY23 results.

Additionally, CQGR implied by the guidance of these SaaS players points towards a pick-up in growth in H2FY24/H2CY23. Similarly, consensus expects hyperscalar revenue growth to revive in CY24 and CY25 post dip in CY23. This is positive for IT services companies like Infosys, which derives 62 per cent of its revenue from digital services, the brokerage said. It has a ‘buy’ rating on the stock with TP of Rs 1,641 per share.