Infosys's stock bounces after analyst's buy call, as IT spending bottoms out

By Tomi Kilgore

Infosys should benefit from its high exposure to discretionary tech spending, focus on GenAI

U.S.-listed shares of Infosys Ltd. were headed for their first gain of 2024 on Thursday, after J.P. Morgan turned bullish, saying the India-based information-technology services company should benefit as discretionary tech spending bottoms out in the coming months.

"Infosys has one of the highest exposures to discretionary tech spends given its high digital exposure, which we believe should benefit the company once the demand cycle turns over the course of [calendar year 2024]," analyst Ankur Rudra wrote in a note to clients.

Rudra raised his rating on Infosys's stock (INFY) to overweight from neutral, and his price target on the U.S.-listed shares to $21.60 from $16.80. The new target implied a 20% upside to Wednesday's closing price.

The stock rose 0.3% in morning trading, which would be its first gain in five sessions. It had shed 3% amid a four-day losing streak, which was the longest such streak since the four-day stretch that ended April 6, 2023.

The upgrade comes a week before Infosys is scheduled to report fiscal third-quarter results. Rudra expects Infosys to be the "fastest-growing" large-capitalization company that he covers and sees margins improving, amid a brighter outlook on the overall IT sector.

He turned neutral on the IT services sector, after being underweight the past 18 months, "as we see signs of growth bottoming out over the next few months, which could support expanded sector multiples."

With this backdrop, Rudra sees potential for Infosys' margins to expand give the company's focus on four areas - "employee pyramid flattening, GenAI and automation, reduction in indirect costs, and improvements in critical portfolios."

He said he believes GenAI, or generative artificial intelligence, will boost productivity for IT services companies, as it can help a developer reduce coding time by up to 50%. The companies can also benefit as Rudra expects this year and next to be marked by "GenAI prep" work by technology companies.

And while GenAI can be deflationary, as revenue generated from existing projects drops due to productivity enhancements, that can be offset as it allows clients to reinvest the savings into new projects. That could include companies building their own GenAI tools, rather than using ones that are publicly available given security concerns.

Infosys' stock has gained 3.8% over the past three months, while the iShares MSCI India ETF INDA has rallied 11.7% and the S&P 500 index SPX has advanced 10.4%.

Akshata Murty, the wife of U.K. Prime Minister Rishi Sunak, holds a near 1% stake in Infosys, according to FactSet data.

-Tomi Kilgore

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01-04-24 0953ET

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