Infosys Limited (NYSE:INFY): A Bearish Investment Perspective

We came across a bearish thesis on Infosys Limited (NYSE:INFY) on ValueInvestorsClub by u0422811. In this article, we will summarize the bears’ thesis on INFY. The company’s shares were trading at $22.07 when this thesis was published, vs. the closing price of $20.06 on Mar 05.

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INFY provides consulting, technology, outsourcing, and next-generation digital services in North America, Europe, India, and internationally. It was founded in 1981 and is headquartered in Bengaluru, India.

According to a study by Deloitte in 2022, IT outsourcing has a market penetration of 76%, which is probably the peak, leaving little room for the double-digit growth that the industry has experienced. As AI adoption reaches Phase II and has a more real business impact, IT outsourcing companies like INFY should have a direct financial impact. AI tends to automate routine tasks while keeping errors at a low level. The employee pricing arbitrage that INFY enjoys can be nullified once AI becomes widespread.

INFY could also face pressure in its operating margin due to the nature of the projects available. During Covid, the demand for websites and applications drove INFY’s revenue higher but the frenzy has subsided. Smaller projects offering better margins have already been lapped up, leaving behind large-scale and slow-moving projects often funded by the government. INFY is already lagging behind its peers in terms of profit margins (EBIT of 21% vs 25-27% for TCS) and may have to take up low-margin projects to grow its business. Another 5.4 percentage points reduction in gross margin can be attributed to ~33% efficiency from GenAI which has an impact on a third of the revenue coming from app development.

While the street expects an HSD growth for INFY, an MSD level looks more practical and would estimate revenues worth $21.4 billion. The 5.30 percentage points margin reduction from GenAI can be negated by operational strategies like labor mix. Taking this into account, the reduction in gross margin should be limited to 2.50 percentage points. Expected 2027 EPS under these assumptions would be $0.76 vs the street consensus of $0.96. Using an optimistic multiple of 20x, the fair value should be $15 or a 25% downside from its current price.

While we acknowledge the potential of INFY as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than INFY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.