Topaz Will Deepen AI Capabilities, Building Generative AI Agents For Future Transformations

Key Takeaways

• Deepening enterprise AI capabilities and large deal wins suggest future growth and expanded offerings in high-demand technology areas.
  
• Focus on cost optimization and strategic growth measures is expected to enhance margins and profitability.
  
• Communication sector challenges and rising costs pressure margins, with slow automotive growth and macroeconomic headwinds affecting revenue and earnings stability.

Catalysts

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

• Infosys is deepening its enterprise AI capabilities with Infosys Topaz and building generative AI agents, which could drive future growth in areas such as AI-powered enterprise transformations. This is likely to positively impact revenue and expand their offering in high-demand technology areas.
  
• The company has revised its revenue growth guidance upwards to 4.5% to 5% in constant currency, indicating expectations of continued growth and recovery, which should enhance revenue growth going forward.
  
• Infosys achieved significant large deal wins with $2.5 billion in TCV, 63% of which were net new deals, suggesting future revenue streams as these deals ramp up and become operational.
  
• The firm is seeing a revival in financial services in Europe and improvement in sectors like retail in the U.S., indicating potential for increased revenue from these regions as discretionary spending picks up.
  
• Infosys’s focus on cost optimization initiatives, cash flow improvements, and the strategic deployment of its growth measures like Topaz and Project Maximus are expected to enhance margins and improve earnings, positioning the company well for higher profitability.

Infosys Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Infosys's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.3% today to 17.7% in 3 years time.
• Analysts expect earnings to reach $4.3 billion (and earnings per share of $0.97) by about February 2028, up from $3.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.4x on those 2028 earnings, up from 27.1x today. This future PE is greater than the current PE for the US IT industry at 31.8x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.61%, as per the Simply Wall St company report.

Infosys Future Earnings Per Share Growth

Risks

• The automotive sector in Europe continues to remain slow, which could negatively impact revenue growth in that region.
  
• Macroeconomic headwinds and supply-demand imbalances are affecting spending patterns in the EURS sector, which could affect earnings stability.
  
• Communication sector faces growth challenges and rising operational expenditure pressure, impacting net margins negatively.
  
• Discretionary spending remains muted in some sectors, suggesting potential revenue shortfalls if cost optimization prevails over new investments.
  
• Increased third-party costs, partly due to large deals, could pressure operating margins if not managed effectively.

Valuation

• The analysts have a consensus price target of ₹2106.829 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 $4.3 billion, and it would be trading on a PE ratio of 35.4x, assuming you use a discount rate of 14.6%.
  
• Given the current share price of ₹1875.65, the analyst price target of ₹2106.83 is 11.0% 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.