The IT pack has turned out to be one of the top beneficiaries in the wake of the coronavirus pandemic and Infosys has been among the most shining members of the Nifty IT pack.
Year-to-date, the stock has not only outperformed the benchmarks index Nifty but its sectoral pack Nifty IT also.
As of December 22 close, shares of Infosys have surged 67 percent on NSE in the calendar year 2020 against a 51 percent gain in Nifty IT and 11 percent gain in the benchmark Nifty50 index.
In its 25th Annual Wealth Creation Study, 2020, brokerage firm Motilal Oswal Financial Services termed Infosys as the fastest wealth creator between 1995 and 2020.
In December 2020, the stock became the fifth one in the country that has a market-capitalisation of more than Rs 5 lakh crore.
Infosys has announced a mega IT infrastructure transformation deal with Daimler AG.
Brokerages and analysts see the stock to rise further in days to come as they point out growth engines for the company have accelerated, powered by multiple drivers.
Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities, pointed out that COVID-19 has accelerated the digital transformation of clients enabled by cloud adoption and will drive demand in the next 3-5 years.
In his views, Infosys has positioned itself as the primary orchestrator of the cloud journey for clients.
"Digital revenue growth has accelerated in recent years, which accounts for 47 percent of the company’s revenue. In digital, the company’s focus areas are cloud, data and cybersecurity. Infosys has sustained elevated large deal wins in the last few quarters with highest ever net new large deal wins in Q2FY21," Oza said.
The company is confident of maintaining stable margins with an opportunity to expand in the medium-term.
Kotak's EBIT margin assumption for FY22 and FY23 stands at 23.2 percent and 23 percent, respectively.
Earnings, as per the brokerage firm, could see a steady CAGR of 13 percent for the next three years.
"The stock trades at 24 times FY22E but has superior RoE of about 27-28 percent. Industry-leading growth potential at stable margins coupled with disciplined capital allocation justifies premium valuations," Oza said, who has a 'buy' rating on the stock with a target price of Rs 1,400.
Oza is not alone in thinking that digital is the growth engine of Infosys.
Jyoti Roy - DVP- Equity Strategist, Angel Broking pointed out Infosys has seen the greatest resilience in demand given high exposure to digital services which accounted for 47 percent of the company’s revenues in Q2FY21.
The demand environment for outsourcing is also expected to remain strong which was highlighted by Accenture in its Q1FY21 earnings last week, Roy added.
He expects demand to remain strong over the next few years and he is positive about Infosys from a long-term perspective.
"At the current levels, the stock is trading at P/E multiples of 24 times FY22 EPS estimate of Rs 50 which is as a discount to TCS and offers value at current levels," Roy said.
Brokerage firm Motilal Oswal is positive on the IT sector despite rich valuations as it believes multi-year growth cycle is awaiting the sector. Infosys is among its top picks from the IT space.
"Over the last two years, investments by Infosys on its sales team has positioned it well to capture large deals with digital components. Its TTM large deal wins have been 73 percent above that two years ago," Motilal Oswal pointed out.
"Infosys' payout ratio of 85 percent of FCF (over a five-year period), despite regular acquisitions, provides an attractive return opportunity to investors," Motilal Oswal added.
Infosys has announced an IT infrastructure transformation deal with Daimler AG in which Infosys will absorb Daimler’s employees across various geographies, including Germany, the rest of Europe, the US and the APAC region.
As per brokerage firm Prabhudas Lilladher, this partnership will enable Daimler to deepen its focus on software engineering and to establish a fully scalable on-demand digital IT infrastructure and anytime-anywhere workplace.
Prabhudas Lilladher believes that the Daimler deal truly highlights Infosys' success in its large deal strategy and also helping clients to navigate in every aspect of their digital journey.
"The collaboration will strengthen Infosys’s automotive expertise. Infosys is well-placed to benefit from this transition. Infosys’ deal pipeline remains strong with clients focusing on accelerated digital transformation, cloud deployment, SaaS and automation projects to improve cost efficiencies," said Prabhudas Lilladher.
"Infosys stays our top pick in the sector as it benefits from near term margin defense and long term growth acceleration from DX/cloud/AI megatrends," Prabhudas Lilladher said.
The brokerage firm values Infosys at 27 times due to: (1) strong revenue acceleration (2) best in class metrics along with broad-based recovery (3) excellent supply chain mechanism (4) strong dividend payouts and (5) all-time high deal wins.
The brokerage firm has a buy call on the stock with a target price of Rs 1,436.
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