Infosys Share price: Sharekhan retains Buy rating with a price target of Rs 1650

Sharekhan recently interacted with Infosys’ management to understand the demand environment, traction for its Cloud offering, pricing strategies for digital offering, deal pipeline, and margin outlook. Sharekhan retains Buy rating on Infosys with a price target to Rs 1650.

Infosys Management believes Infosys Cobalt has been a real differentiator for the company, with a first-mover advantage. Infosys is well positioned to play as a prime orchestrator of the Cloud journey: Reuters

Sharekhan recently interacted with Infosys’ management to understand the demand environment, traction for its Cloud offering, pricing strategies for digital offering, deal pipeline, and margin outlook. Sharekhan retains Buy rating on Infosys with a price target to Rs 1650. Infosys Share price today Rs 1345, trading flat.

Infosys Management highlighted that its strategic investment priorities in areas such as:

1) Cloud
2) Data
3) Experience
4) cyber security

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These have been yielding good results, which were reflected from its strong performance in its digital business during COVID-19.

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Infosys digital revenue has reported a 7.6% CQGR since Q1 FY18, and its contribution stood at 50.1% in Q3 FY21. As COVID-19 has acted as a catalyst in accelerating the demand for digital and cloud transformation across industries, Infosys launched Infosys Cobalt to help clients in building capabilities using the features across leading SaaS, IaaS, and PaaS platforms.

Infosys Management indicated that FY2022E growth would be driven by:

1) higher spending on Cloud-related technologies by clients (to tap opportunities it launched Infosys Cobalt in August 2020)
2) strong demand for cyber security, data analytics and enhancement of customer experience
3) rising demand for core transformation
4) continued strong deal wins ($12 billion in YTD FY2021 versus $9 billion in FY2020)
5) higher pricing for certain new-age technologies (which negates pricing pressure in the legacy business)
6) stronger deal pipeline even after a large deal wins over the last couple of quarters.

Sharekhan believes the pace of deal signings would remain strong (given strong participation in RFPs) in the coming quarters, as it has been reaping benefits from accelerated investments on enhancing capabilities, sales transformation initiatives, and increased focus on large deals over the past three years. During the quarter, Infosys has won a nearly $500 mn deal from Google to provide customer experience and engineering support for its products.

Infosys Management indicated that the company has better pricing for its digital portfolio, given its sharpening focus on value-based pricing. Though margins would be impacted from the increase in travel and facility expenses and higher selling and marketing in the coming quarters, these expenses may not return to pre-COVID level even after normalcy.

Sharekhan believes these margin headwinds coupled with increasing competitive intensity and higher expenses owing to the initial period of ramp-up of large deals would be offset to some extent because of higher offshore mix, automation, improving onsite employee pyramid, lower subcontractor expenses, and better pricing in digital offering.

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