Infosys signs five-year AI deal with $2 billion target spend

Infosys share price: Infosys, the IT services bellwether, announced on July 18 (Tuesday) that it has entered into a framework agreement with one of its existing strategic clients to provide artificial intelligence (AI) and automation-led development, modernisation, and maintenance services. The total client target spend over five years is estimated at $2 billion, the company said in its statement.

The stock settled at Rs 1,475 on the BSE, up 3.67 per cent from the previous close.

Infosys is slated to release its June quarter (Q1FY24) on July 20 (Thursday). Its peers, TCS and HCL Tech have already released their June quarter numbers. The IT pack is expected to post soft numbers owing to fears of a recession in the US economy.

The IT sector has been underperforming for around a year now; however, in the last couple of sessions, it has witnessed impressive buying interest.

Last week, shares of information technology companies surged 4.5 per cent on Friday, their biggest one-day jump since September 2020, boosted by strong deal pipelines and rising expectations of an imminent pause in US rate hikes.

The Nifty IT stocks have lagged the blue-chip indexes for a large part of the year due to worries that clients would cut spending, especially in the key U.S. market after the collapse of Silicon Valley Bank and as the Federal Reserve showed no signs of backing off rate hikes, according to a Reuters report.

However, US inflation data on Wednesday bolstered hopes that the Fed could end rate hikes after July. That same day, Tata Consultancy Services reported a roughly 24 per cent jump in its order book, while a day later, Wipro reported a 9 per cent increase in large orders.

"Hopes of a stronger performance and growth recovery in the second half of fiscal 2024 and U.S. macro indicators looking more favourable could be among a combination of factors that are driving IT stocks up, "said Apurva Prasad, Vice President, Institutional Research at HDFC Securities.

Infosys and AI

The Artificial Intelligence-first business strategy adopted by Infosys is working well for the company despite unresolved ethical and IPR issues around the technology, Infosys Chairman Nandan Nilekani said last month. In his address at Infosys' 42nd Annual General Meeting, Nilekani said the company can be more efficient while nurturing readiness for growth, given its performance in challenging scenarios created by inflation, interest rates, geopolitics, demand volatility and supply chain dislocations.

"Several practical, ethical and intellectual property-related issues, when it comes to AI remain unresolved. We also know that the motto of scaling AI in the enterprise is far from simple. And yet, the AI-first strategy we're embracing already working for us," Nilekani said.

He said that the board has approved a dividend of Rs 17.5 per share, taking the total to Rs 34 per share. "The company has returned approximately 86 per cent of free cash flow to shareholders over four years starting FY20," Nilekani said. READ MORE  

What analysts say

Infosys is taking an AI-first approach to enhance its own employee productivity through AI, analytics, and cloud capabilities, even as it builds AI-centric services for clients. The company is leveraging its alliances with Robotic Process Automation (RPA) providers and AI Infrastructure players such as Nvidia to build ready-to-use AI use cases and automate client processes, notes JM Financial Research in its report dated June 15.

TCS says it is well-positioned to partner with clients in their initial experimentation around generative AI, supported by its investments in research and innovation. These companies are also building capabilities through training employees at scale.

"Even though, as Infosys said, the journey to scale AI at the enterprise level will not be linear, we believe companies such as Infosys and TCS will play a pivotal role in generative AI’s adoption. Deflationary risk, due to lower effort per function point, is at least a few years out, in our view," the brokerage added.