AI Transformation And Cybersecurity In Japan Will Create Future Opportunities

Key Takeaways

• Increased client demand for AI-led transformations and strategic acquisitions could drive future revenue growth and expand service offerings.
  
• Focus on cost efficiencies, large deal wins, and strong cash flow guidance support profitability and sustained shareholder returns.
  
• Macroeconomic uncertainties and client spending caution threaten Infosys' revenue growth, while acquisition costs and regulations pressure margins.

Catalysts

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

• Infosys is seeing an increased demand from clients for AI-led transformations, which could drive future revenue growth as clients increasingly prioritize AI investments for process improvements and customer experiences.
  
• Strategic acquisitions in energy consulting and cybersecurity, along with a new strategic partner in Japan, position Infosys to expand its service offerings and client base, positively impacting future revenue and earnings.
  
• The continued focus on cost efficiencies and automation through Project Maximus has the potential to improve operating margins, which would benefit net margins and overall profitability.
  
• The company's large deal wins with a significant portion being net new provide a solid base for future revenue growth, cushioning against potential macroeconomic challenges.
  
• Infosys's guidance for maintaining strong free cash flow generation and its ongoing commitment to a high dividend payout ratio suggest sustained shareholder returns, supporting future EPS growth through a combination of earnings retention and dividend payments.

Infosys Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Infosys's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.4% today to 16.8% in 3 years time.
• Analysts expect earnings to reach $3.8 billion (and earnings per share of $0.93) by about May 2028, up from $3.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 30.8x on those 2028 earnings, up from 23.3x today. This future PE is greater than the current PE for the US IT industry at 26.7x.
• Analysts expect the number of shares outstanding to decline by 1.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.31%, as per the Simply Wall St company report.

Infosys Future Earnings Per Share Growth

Risks

• The guidance for financial year 2026 shows an anticipated growth range of only 0% to 3% in constant currency terms, highlighting potential revenue stagnation due to uncertainties in the macroeconomic environment.
  
• The company noted a 3.5% sequential revenue decline in Q4 FY'25, largely due to a reduction in third-party costs and seasonal weakness, indicating potential pressure on upcoming revenues.
  
• Persistent uncertainties relating to tariffs, geopolitical tensions, and client caution in discretionary spending could lead to delayed decision-making and impact revenue growth.
  
• There was a noted impact from acquisition-related costs and other headwinds on margins, and unexpected increases in third-party costs could further pressure net margins.
  
• The regulatory environment and changes in client budget allocations focusing on cost management could strain future revenues, especially if clients further defer or restructure spending on large technology projects.

Valuation

• The analysts have a consensus price target of ₹1653.909 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 ₹2015.0, and the most bearish reporting a price target of just ₹1350.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $22.8 billion, earnings will come to $3.8 billion, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 15.3%.
• Given the current share price of ₹1500.1, the analyst price target of ₹1653.91 is 9.3% 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.