Infosys Top Idea in IT Space - Robust growth and profitability outlook, says Motilal Oswal

Motilal Oswal remains positive on Infosys and reiterates the stock as top idea in the I.T. services space. Motilal Oswal sees the company as delivering the best growth in near to medium term in the large cap space and sees the current FY22 P/E of 21x as attractive given the long term growth opportunity.

Motilal Oswal says overall, very positive commentary, as management expressed

a) Their confidence of returning to Pre-COVID level of growth
b) Scope for further upside on operating margins
c) Significant opportunity from the shift to Cloud
d) Acceleration in deal pipeline since the pandemic. Also highlighted ambition to eventually have 33% WFH. Nandan's comments should mitigate any remnant concern on board stability.

Cloud the key focus of the meet:

From Chairman to management, everyone highlighted the opportunity presented by the Cloud and their response through the launch of Infosys Cobalt, the first Cloud brand in the I.T. services market. Infosys expect this to drive massive market opportunity in the migration and maintenance space and highlighted their 35K associates focus in the space

Margin expansion despite investment need:

Infosys believes that there is scope for margin expansion despite continued need for investment in automation and Digital capability. They still see scope in offshore mix, automation, subcon etc to drive margin improvement.     

Sharekhan maintains Buy rating on Infosys with a price target of Rs 1350. Strategic decisions taken by the management three years ago to accelerate investments on strengthening digital capabilities have been reaping benefits. Š

The management highlighted that growth would be driven by:

(1)    Scaling up of digital capabilities
(2)    Large deal wins
(3)    Account expansion
(4)    New logo opening.

Management continues to maintain a strategic blueprint over the past three years. Sharekhan prefers Infosys as it is one of the industry leaders with robust execution capabilities, strong balance sheet, healthy FCF generation capability and a higher dividend payout.

Sharekhan attended Infosys’ annual investor day, wherein management discussed technology trends, growth strategy, levers for margin expansion, opportunities in cloud and localization. Mr. Nandan Nilekani highlighted that the strategic decision taken by the management three years ago to accelerate investments on strengthening digital capabilities helps the company to participate in clients’ digital transformation journey.

The pandemic has accelerated the digital transformation spends in the area of:

(1) Consumerization of user experience – demand for building user-friendly applications
(2) Adoption of open source technology in the enterprise as it is highly scalable and cheaper to operate
(3) Higher cloud adoption
(4) Rise of artificial intelligence (AI) and deep learning
(5) Cybersecurity
(6) Digital platforms
(7) Modernisation of legacy systems.

The management highlighted that growth would be driven by:

(1) Digital - company’s digital business contribution increased to 47.3% from 23.9% in Q1 FY2018
 (2) Strong momentum in large deal wins
 (3) Account expansion
(4) New logo opening.

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The management remains confident that pre-Covid growth momentum (7.9%/8.3% growth in FY2019/FY2020) would come back once the situation settles down. Company focuses on onsite and offshore mix, pyramid rationalisation, automation, reduced sub-contractor expenses and higher digital revenue to maintain its margin trajectory going ahead. The company’s localisation strategy is helping the company to mitigate H1-B related challenges. Company is now 63% visa independent in the US and over 50% in Europe and Australia. The company focuses on cloud business as it is estimated that around $500 billion would be spent on Cloud technologies in next 2-3 years.

Infosys has been progressing well in terms of growth in digital business and consistent execution under the leadership of Mr. Salil Parekh. Infosys would continue to deliver industry leading numbers in FY2022E/FY2023E, led by continued large deal wins, enhanced digital capabilities (aided by organic investments, acquisitions and partnerships) and strong execution. Infosys is one of the industry leaders with robust execution capabilities, a strong balance sheet, healthy FCF generation capability and higher dividend payout. Further, top management has remained stable in last three years.