Investments In Topaz And European Growth Will Drive Future Demand

Key Takeaways

• Strong financial sector growth in U.S. and Europe, boosted by large deal wins, could drive sustained revenue expansion in these markets.
  
• Investments in AI technologies, including Topaz and language models, may enhance demand, boosting productivity, innovation, and margins.
  
• Reliance on third-party revenues, volatile communication sector, and slow automotive growth pose potential challenges for revenue and profit margin stability.

Catalysts

Provides consulting, technology, outsourcing, and next-generation digital services in North America, Europe, India, and internationally.

• Infosys is seeing strong growth in its financial services sector, especially in the U.S. and Europe, indicating that further revenue growth could come from continued expansion in these regions.
  
• The revival in discretionary spending in the retail and consumer product industries in the U.S. suggests potential for increased revenues as consumer sentiment improves and companies invest in new technologies.
  
• Large deal wins, with a significant portion being net new, suggest sustained revenue growth opportunities as these deals ramp up in the future.
  
• Investments in generative AI, including Infosys Topaz and the development of small language models, are enhancing capabilities that could lead to increased demand and higher margins from AI-driven productivity and innovation.
  
• Improved performance in Europe, with double-digit growth and a strong large deal pipeline, indicates potential for increased earnings due to strengthened market position and expanded client engagements.

Infosys Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Infosys's revenue will grow by 8.0% annually over the next 3 years.
• Analysts are assuming Infosys's profit margins will remain the same at 17.3% over the next 3 years.
• Analysts expect earnings to reach $4.2 billion (and earnings per share of $0.96) by about March 2028, up from $3.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $3.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.9x on those 2028 earnings, up from 22.9x today. This future PE is greater than the current PE for the US IT industry at 25.9x.
• Analysts expect the number of shares outstanding to grow by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.03%, as per the Simply Wall St company report.

Infosys Future Earnings Per Share Growth

Risks

• The slow growth in the automotive sector in Europe indicates potential challenges in gaining revenues from this vertical, which could impact overall company revenue growth.
  
• The communication sector's volatile macro environment and rising operational expenses might inhibit revenue growth, as discretionary spending remains soft.
  
• The impact of seasonality, such as lower working days and calendar days in Q4, could adversely affect revenue streams and margins.
  
• With high third-party costs impacting margins, the sustained increase in external expenses may challenge net profit growth if not balanced with commensurate revenue.
  
• The current reliance on third-party revenues, driven by large deals with high third-party costs, might introduce variability in profit margins if these revenues do not sustain or grow as projected.

Valuation

• The analysts have a consensus price target of ₹2066.125 for Infosys based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2350.0, and the most bearish reporting a price target of just ₹1570.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $24.1 billion, earnings will come to $4.2 billion, and it would be trading on a PE ratio of 35.9x, assuming you use a discount rate of 15.0%.
  
• Given the current share price of ₹1590.85, the analyst price target of ₹2066.12 is 23.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.