Infosys share price underperforms IT index. Buying opportunity or stay away stock?

Infosys share price declined about a percent in intraday trade on BSE on Thursday, in sync with a weak market sentiment even as a day ago the company announced an expansion of its strategic partnership with US chipmaker, Nvidia which, as per market participants, is a positive development.

As Mint reported, Infosys on Wednesday announced an expansion of its strategic partnership with US chipmaker, Nvidia. As part of the partnership, Nvidia will offer its artificial intelligence (AI) models, tools, applications and compute infrastructure to Infosys, which in turn will train 50,000 of its over 3.36 lakh employees on Nvidia’s AI stack through a dedicated centre of excellence (CoE).

In a stock exchange filing, Nandan Nilekani, co-founder and chairman of Infosys, India’s second-largest information technology (IT) services firm by market capitalisation, said that the company was “transforming into an AI-first company to better provide AI-based services to our clients worldwide."

Read more: Infosys to train 50k employees on Nvidia AI stack

Infosys share price has significantly underperformed its sectoral index BSE IT and the benchmark Sensex in the last one year. While the BSE IT is up about 21 per cent in the last one year, Infosys share price is up only about 8 per cent. The Sensex has gained nearly 12 per cent in the same period.

But sentiment appears to be improving for Infosys stock as it has shown remarkable gains in the last few months. In fact, if we consider a shorter timeframe of the last three months, the stock is up over 14 per cent while the BSE IT is up 12 per cent and the Sensex is up 4 per cent. On a monthly basis, the stock has been in the green since May this year.

While disclosing its June quarter earnings this year, Infosys significantly reduced its revenue guidance from 4-7 per cent to 1-3.5 per cent for FY24 but retained its operating margin forecast. It underscored that its solid deal pipeline and strong major deal closes placed it well for future development.

While the US economy is expected to steer clear of a recession and the likelihood of rate hikes is currently weak, it is possible that most of the downsides for Infosys and other major Indian IT companies have already been factored in.

Also read: Infosys only Indian company in top 100 TIME World's Best Companies list

Meanwhile, Infosys will announce its Q2FY24 financial result and interim dividend on October 12. The board of directors meeting of Infosys will be held on October 11 and October 12. The investor call will be held by the company on October 12 prior to the announcement of the result.

Fundamental views on Infosys share price

As per Trendlyne, the consensus recommendation from 39 analysts for Infosys is 'hold'.

Recently, global brokerage firm Bernstein said Infosys is its top pick among the IT services providers. Bernstein, as reported by CNBC-TV18, pointed out that the investor focus has shifted from the financial year 2024 to the financial year 2025 and that selective large-cap IT stocks, such as Infosys and TCS may be better-positioned than their mid-cap peers going into the financial year 2025.

Even the brokerage firm Kotak Institutional Equities has kept Infosys among its top picks.

Kotak expects a recovery in revenue growth for a few large companies to 9-10 per cent in FY25E from about 4-5 per cent in FY24E due to the ramp-up of mega deals signed recently, a strong pipeline of cost take-out programs and likely improvement in discretionary spending.

"Companies that can address both agendas—cost take-out and transformation journey of clients are the best positioned—Infosys, TCS and HCL Tech fit the bill. Infosys and HCLT are our top picks," Kotak said.

Kotak has a buy call on Infosys and it has raised the target price of the stock to ₹1,710 from ₹1,550 earlier.

Brokerage firms pointed out that in the recent past, Infosys, along with some other large IT players, has announced several deals in the area of digital platform development and maintenance as well as AI (artificial intelligence) and automation-led development, modernisation, and maintenance services.

"Indian IT has won plenty of mega deals in recent months, powered by cost take-out mandates of enterprises. Infosys, HCL Tech and TCS have been beneficiaries of such deals. We believe deal flow has steadied after the transition from discretionary spending-powered short-tenured programs to larger programs fueled by cost take-outs, which have longer sales cycles. We expect the continuation of cost take-out deals in CY2024, along with an improvement in discretionary spending," said brokerage firm Kotak.

Infosys share price has some valuation comfort also at this juncture. Its current PE (price-to-earnings ratio) is 25.2 in comparison to the median PE of 29.44. Its current PB (price-to-book-value) is 8.17 against the median PB of 8.62.

Technical views on Infosys share price

Technical analysts see some signs of fatigue in the stock but they believe the stock is buy-worthy for the long term and one should accumulate it in case of declines.

Jigar S. Patel, Senior Manager of Equity Research at Anand Rathi Share and Stock Brokers pointed out that at the current juncture, Infosys looks a bit exhausted at higher levels near ₹1,500.

"As we advance, support is seen near ₹1,425–1,450 and resistance is seen near ₹1,500–1,525. Also, the Ichimoku cloud is hinting towards some sideways moves in the coming sessions as the Ichimoku cloud angle is getting flatter," said Patel.

Foram Chheda, CMT, and Founder of ChartAnalytics.co.in, observed that the Nifty IT Index witnessed a multi-month breakout on the weekly charts and along these lines, Infosys witnessed a stellar run in the past two months gaining nearly 16 per cent from the lows seen in July to the recent high.

Chheda pointed out that the stock might face short-term resistance in the ₹1,500-1,520 zone. However, she added that with support placed near the 1,460 level, and with the stock sitting on the verge of a golden crossover where the 50-day moving average will cross above the 200-day moving average, all price declines can be considered as an opportunity to buy so long as the ₹1,460 level stay defended.

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Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.