A Stock Analysis of India's Second Largest IT Firm: Infosys

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A Teardown of Infosys Stock

Business Overview

Infosys is a multinational IT company headquartered in Bangalore, India and founded in 1981. Infosys provides IT, consulting and outsourcing services. Infosys is India’s second largest IT company by revenue and was the 4th Indian company to cross a 100 billion dollars in market capitalization. Infosys has 1741 clients in over 50 countries from various sectors. One of Infosys’ biggest products is a proprietary digital banking solution, Finacle, used by multiple leading banks across the world. 

Industry Background

Infosys is a global leader in a rapidly growing sector. The IT industry in India is expected to grow at 15.5% in FY’22, almost double the GDP growth, according to industry body Nasscom. The IT industry has been an increasing contributor to global GDP and is expected to continue its strong growth into the future. With rapid transitions to technological solutions, the IT and consulting services sector is one that contributes to almost all other sectors, becoming a central part of any industry and providing huge growth opportunities. The IT services sector in India is projected to have double digit growth through 2025 and the global industry at about 6%, making it one of the fastest growing sectors. 

Client Profile

Infosys’ 1741 clients come from various sectors and regions. The breakdown of clients by sector and region can be seen below. 

Almost a third of clients come from financial services, including 8 of the top 10 US banks as well as 7 of the top 10 global insurance companies. The global financial services industry is expected to have robust growth at 6% CAGR till 2025, suggesting increasing demand for IT consulting from the sector. 

North America dominates the clients of Infosys suggesting that a majority of revenues comes from this region as well. Infosys has a large presence in the US with top clients and huge investments in the country. Infosys has a significant number of employees and offices in the US. North America is the hub of technology and has the highest level of innovation and research. Being a significant player in the US gives Infosys access to the largest market. Additionally, income from the US earned in dollars will be benefited by the rupee's continuous depreciation. Since a majority of their income is in dollars, this is a huge benefit for Infosys that could give it an edge over competitors. 

Client BasketQ1 '21Q2'21Q3'21Q4'21Q1'22Q2'22Q3'22
$1 Mn Clients729745761779805841854
$10 Mn Clients236245246252264270274
$50 Mn Clients60606059596264
$100 Mn Clients135292934343537

The client profile above shows a gradually increasing number of clients in FY 2021-22, including large 100 million dollar deals. Some of the largest recent deals include billion dollar plus clients, Daimler and Vanguard.

Infosys shows strong revenue growth from FY18-22. FY23 is projected to have 13-15% growth, in line with industry and beating out competitors Wipro and TCS. A shift from core to digital has been a big driver of revenue, apart from scale of cloud business and advanced automation.

 Operating Profits and Margins

The operating profit of Infosys has shown steady growth since FY20. Even in the pandemic year FY20, there was a small growth in profit. While operating margin did see a fall, with the transition to a pandemic the 4-5% change is not an indicator of poor financial health. Operating margins did see growth in FY21 before a slight dip in FY22. In general, the range of operating margin in the last five years is a sign of good operational efficiency. 

Operating Cash Flow

Operating cash flow has increased consistently and has been a significantly strong value, suggesting that Infosys will have the ability to pay future obligations and provide good returns to shareholders. It also gives Infosys a strong buffer for financial challenges and sudden changes in the general macroeconomic environment.

Analysts Review

Motilal Oswal : “Buy”

  • Despite slow demand reported in the March quarter, a strong order book on the back of increased IT spends across various sectors can benefit the company.
  • It further added “We expect Infosys to deliver margin on the higher side of its guidance band, with strong growth and reduced dependence on sub-contractors as attrition falls.”
  • Target price: ₹2000, increase by 33%

IIFL Securities: “Buy”

  • Despite the ongoing macroeconomic challenges, the demand is poised to meet the targets set by the company for FY23, the analyst said.
  • Focus on fulfilling demand and gaining wallet share compared to peers is imperative in the near term as shown by EBIT guidance of 21-23% for FY23 by the company.
  • Target Price: ₹2000, up by 33%.