We came across a bullish thesis on Infosys Limited (INFY) on Long-term Investing’s Substack by Sanjiv. In this article, we will summarize the bulls’ thesis on INFY. Infosys Limited’s share was trading at $22.51 as of Oct 18th. INFY’s trailing and forward P/E were 29.23 and 28.82 respectively according to Yahoo Finance.
A close-up of two software engineers typing away at laptops in a modern, well-lit office.
Infosys, based in Bengaluru, India, is a prominent player in the Information Technology Enabled Services (ITES) sector, employing over 317,000 professionals and serving more than 1,882 clients across 56 countries. Of its workforce, 299,814 employees are directly involved in service delivery to clients, including trainees. A considerable portion of Infosys’s revenue, approximately 60%, is derived from North America, while about 27% comes from Europe. The company’s business model is distinguished by its ability to generate substantial cash flow with minimal capital expenditures. Historically, Infosys has returned around 85% of its free cash flow (FCF) to shareholders through dividends and share buybacks, showcasing its commitment to shareholder returns.
Although recent revenue growth has slowed due to clients’ reluctance to engage in discretionary spending, analysts anticipate a recovery, projecting growth rates of 4.3% for the current year and 8.6% by FY 2026. For FY 2024, Infosys reported revenue of $18.56 billion and maintained steady operating margins, currently around 21%, although they are experiencing a slight decline. The company’s Return on Equity (ROE) is impressive at approximately 31%, and both cash from operations and FCF have consistently increased, reflecting the low capital expenditure nature of the business.
In terms of strengths, Infosys boasts an established brand and a solid market presence, benefiting from an export-oriented model that leverages currency depreciation. The company has a strong balance sheet, characterized by low capital expenditure requirements and no long-term debt.
However, Infosys faces some challenges, particularly in its recruitment and retention strategies. Historically, one of the company’s key business challenges has been hiring and training enough IT engineers to meet client demand while minimizing bench time, during which employees are not actively working on client projects. Retaining trained employees also remains a critical concern. Additionally, the company is experiencing slower growth due to its size and operational structure, gradually declining margins, and a primarily service-focused model with limited software product offerings.
Opportunities exist in the growing demand for IT services driven by the AI revolution and the potential for acquiring new clients as businesses pursue digital transformation. On the downside, threats include the risk that AI and automation may diminish the need for traditional IT services, rising wage pressures in India’s economy potentially eroding cost advantages, and fierce competition from both domestic and international firms.
Currently, Infosys’s stock is trading at a two-year forward Price-to-Earnings (P/E) ratio of 26X, which implies an earnings yield of about 3.8%. This is in contrast to Cognizant’s lower P/E of 15X, indicating that Infosys’s superior profitability justifies its premium valuation. A Discounted Cash Flow (DCF) analysis suggests that Infosys is favorably valued relative to its peers. Despite the challenges posed by changing market dynamics and technological advancements, Infosys remains a formidable player in the IT services industry. Its strong cash flow generation, commitment to returning capital to shareholders, and potential to adapt to AI-driven changes position the company well for long-term growth.
Infosys Limited is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 19 hedge fund portfolios held INFY at the end of the second quarter which was 25 in the previous quarter. While we acknowledge the risk and potential of INFY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than INFY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.