J.P. Morgan Turns Bullish on Infosys
Shares of Infosys Ltd., listed on the U.S. stock market, are anticipated to see their first gain of 2024, following a positive outlook from J.P. Morgan. The prominent international investment bank suggests that the India-based information-technology services company will benefit from a rebound in discretionary tech spending in the upcoming months.
High Potential for Infosys in Discretionary Tech Spends
According to analyst Ankur Rudra, Infosys has a significant exposure to discretionary tech spends due to its strong presence in the digital market. As the demand cycle is projected to shift during calendar year 2024, Rudra believes that Infosys is well-positioned to capitalize on this trend.
Rating Upgrade and Revised Price Target
Rudra has upgraded Infosys’s stock (INFY, -0.22%) from neutral to overweight, accompanied by a revised price target for the company’s U.S.-listed shares. The new target of $21.60 suggests a potential upside of 20% compared to the closing price on Wednesday.
Positive Momentum After Recent Losses
After a four-day losing streak, which marked the longest stretch since April 6, 2023, Infosys’s stock has experienced a decline of 3%. However, it shows signs of a reversal with a 1% increase during premarket trading, likely indicating the end of this downward trend.
Anticipation of Strong Q3 Results
The upgrade comes just before Infosys’s scheduled release of its fiscal third-quarter results. Rudra anticipates that Infosys will outperform other large-capitalization companies he covers and forecasts improved margins for the company, underlining a positive outlook for the overall IT sector.
Potential for Growth in the IT Services Sector
After being underweight in the IT services sector for the past 18 months, there are signs that growth may be bottoming out over the next few months. This has prompted a change in perspective for Rudra, who now sees potential for expanded sector multiples.
Infosys Focus on Margins and Expansion
One company that stands to benefit from this potential growth is Infosys. Rudra believes that Infosys’ margins could expand due to their focus on four key areas:
- Employee Pyramid Flattening: Infosys is streamlining its workforce, which will result in improved efficiency and cost savings.
- GenAI and Automation: The implementation of generative artificial intelligence (GenAI) and automation technologies can significantly boost productivity for IT services companies. Developers can expect to reduce their coding time by up to 50%.
- Reduction in Indirect Costs: By identifying and eliminating unnecessary indirect costs, Infosys can further improve its margins.
- Improvements in Critical Portfolios: Infosys is prioritizing the enhancement of its critical portfolios to drive growth.
The Potential of GenAI
Rudra highlights the potential for GenAI to revolutionize the IT services industry. While it may initially lead to deflationary effects as revenue from existing projects decreases, the savings generated can be reinvested into new projects. Additionally, companies may opt to develop their own GenAI tools to address security concerns instead of relying on publicly available ones.
Positive Stock Performance
Infosys’ stock has shown positive performance in recent months, gaining 3.4% over the past three months. This aligns with the broader market trend, as indicated by the iShares MSCI India ETF INDA, which has rallied 10.8%, and the S&P 500 index SPX, which has advanced 10.3%.
In conclusion, there is optimism for growth in the IT services sector, with Infosys well-positioned to capitalize on this potential through its focus on margins, GenAI adoption, cost reduction, and portfolio improvements.
