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ICICI Securities maintains Buy rating on the stock with a revised target price of  ₹1,610. (REUTERS)
ICICI Securities maintains Buy rating on the stock with a revised target price of 1,610. (REUTERS)

Analysts give buy rating to Infosys, revise target price upward

ICICI Securities believe the technology sector will witness multi-year growth in coming years led by traction in digital technologies.

Infosys reported a healthy set of Q3FY21 numbers. Dollar revenues increased 5.3% QoQ vs. our estimate of 3.3% in constant currency terms. Once again in this quarter, the company has outperformed Tata Consultancy Service (TCS) in terms of revenue growth. Infosys also reported flat QoQ margins despite headwinds of large deal transition cost and higher sub con cost. In terms of guidance, the company has revised its FY21E revenues guidance upwards from 2-3% to 4.5-5% and operating margin guidance to 21-23% from 24-24.5%.

ICICI Securities maintains Buy rating on the Infosys stock with a revised target price of 1,610. Previous target price was 1450. Current market price of a share of Infosys is 1,370.50.

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"We expect Infosys to be a key beneficiary of multi-year growth in digital technology considering its digital prowess and its ability to provide an end to end solution. This, coupled with increase in outsourcing in the US and Europe, vendor consolidation opportunities, captive carve outs and cost takeout deals will further boost revenues," says the brokerage.

In addition, healthy deal wins are expected to help the company make a steady improvement in financials in coming quarters. Infosys has consistently outperformed TCS over the past few quarters and also narrowed the margin gap between the two companies. As a result, we expect the PE multiple discount between Infosys and TCS to narrow.

ICICI Securities believe the technology sector will witness multi-year growth in coming years led by traction in digital technologies. "Infosys is in a sweet spot to capture this growth considering the investment it has made in digital technologies. This, coupled with increase in outsourcing in the US and Europe, vendor consolidation opportunities, captive carve outs and cost take out deals will further boost its revenues," says the brokerage.

In addition, Infosys has executed well on large deal conversion and is expected to be a key driver of revenue growth in the long run. The brokerage expects the company to register 11.2% CAGR in dollar revenues over FY20-23E.

Infosys will give wage hike to all its employees effective January 2021, which will impact near term margins. However, ICICI Securities believes with many levers available to the company, the company will register EBIT margins near the upper end of guided range of 24-24.5% in FY21E.

"We believe higher revenue growth, automation, offshoring and pyramid rationalisation will enable the company to maintain its FY21E margins. Hence, we expect margins to stabilise at 24.5% and 24.6% in FY22E and FY23E, respectively," says the brokerage.

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