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How Long Can Infosys Rely on a Strong Demand Environment?
Stock Analysis & Ideas

How Long Can Infosys Rely on a Strong Demand Environment?

Indian tech company Infosys (NYSE: INFY) reported strong results for the third quarter of fiscal 2022 last week. The INFY stock has had a good run at the stock exchanges over the past year, with a 46.94% rally in prices.

Strong Q3 on Strong IT Demand

The rapid rise of digital transformation across various industries is boding well for the company, which is benefiting from large deal wins in this area. Moreover, the increase in estimates for the full-year fiscal 2022 outlook from management was another positive that drove attention to the stock.

Way back in December 2020, Infosys had signed a massive $3.2 billion digital transformation contract with Daimler, a deal that is contributing healthily to the top line consistently. In the recently reported quarter, Daimler ramped up its partnership with Infosys and contributed meaningfully to the 48.4% year-over-year growth in the latter’s manufacturing segment.

The potential of Infosys to outperform the market makes it one of the top 30 best stocks to buy, according to the TipRanks Smart Score tracker.

Expert Holds Positive Opinion

Following the earnings release, BMO Capital Markets analyst Keith Bachman analyzed Infosys’ developments and fundamentals and emerged confident about the company’s prospects. “We believe INFY’s report is yet another positive report for the broader IT services market, led by robust growth, stable margins, and stable attrition trends,” observed Bachman.

The analyst expects year-over-year growth of 12.5% for the fiscal year 2023, on a constant currency basis. He believes that the current demand for Infosys’ IT services, or IT services in general, will continue to be strong over the next 12 months at the least, as “COVID has been a catalyst for altering IT architectures.”

Coming to the bottom line, Bachman was impressed with the stability that Infosys managed to maintain in its margins during times of higher wages. Wage hikes led to an additional $35 million of expenses approximately in 3QF22, which were successfully balanced out with optimized cost savings. However, weak free cash flow generation concerned the analyst.

The analyst raised his price target on Infosys to $28 from $25. Nonetheless, Bachman chose to rate the company a Hold. “We think Infosys will be challenged to grow revenue and margins concurrently, given sector challenges. Although we think valuation is reasonable, we choose to stay on the sidelines,” explained Bachman.

The rest of Wall Street has a cautiously optimistic stance as well, with an average rating of Moderate Buy, based on 5 Buys, 3 Holds, and 1 Sell. The Infosys stock prediction points at an average price of $28.01.

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