Report Date: 2025-04-20

Current Price: ₹1,420

1. EXECUTIVE SUMMARY

Recommendation: SELL

• Target Price: ₹1,268 (-10.7% downside from current ₹1,420)
• Investment Timeframe: Medium-term (6-12 months)
• Key Reasons:
  • Current price exceeds fair value by 10.7% based on weighted valuation models
  • Technical indicators show strong bearish momentum with stock near 52-week lows
  • Growth deceleration with 1-year profit growth of only 1.9% vs 5-year CAGR of 10%

2. FINANCIAL ASSESSMENT

Infosys demonstrates excellent financial health (score: 80) with strong profitability metrics including 37.8% ROCE and 29% ROE. However, growth is decelerating significantly - sales growth slowed to 6.1% (1-year) from 12.4% (5-year CAGR), while profit growth plummeted to 1.9% (1-year) from 10% (5-year CAGR). This deceleration raises concerns about future performance.

The company maintains a strong balance sheet with minimal debt (₹8,227 crores) against ₹95,818 crores in equity. Free cash flow is robust at ₹33,748 crores with an improving trend, supporting the attractive 2.68% dividend yield and 65.9% payout ratio. However, the increasing debt-equity ratio trend (8.59 vs 4.2 average) warrants monitoring.

3. VALUATION ANALYSIS

Infosys currently trades at a PE ratio of 22.1x, which appears elevated given the significant growth slowdown. The weighted fair value estimate of ₹1,268 incorporates:

• DCF valuation: ₹1,196 (50% weight) - assumes 10% initial growth declining to 4% terminal growth
• P/E multiple: ₹1,286 (30% weight) - based on target P/E of 20x
• P/B multiple: ₹1,420 (20% weight) - based on current P/B of 6.15x

The DCF model suggests the most significant overvaluation (-15.8%), while P/B valuation indicates fair pricing. Overall, the stock appears overvalued by 10.7%, justifying a sell recommendation.

4. TECHNICAL OUTLOOK

Technical indicators strongly support a bearish outlook:

• Stock trading 12.9% below 50-day MA and 18.4% below 200-day MA
• Death cross pattern (50-day MA below 200-day MA)
• Strong downtrend with 11.8% decline over 20 days
• RSI at 31 indicating oversold conditions but not extreme

Support levels exist at ₹1,417 and ₹1,395, with resistance at ₹1,441, ₹1,472, and ₹1,534. The significantly increasing trading volume (+41.1%) with recent volume spikes suggests heightened selling pressure, though a potential double bottom pattern could signal a reversal.

5. RISK ASSESSMENT

• Valuation Risk: P/B valuation suggests fair pricing; if growth reaccelerates, stock could recover
• Technical Reversal: Potential double bottom pattern could trigger short-term price recovery
• Sector Rotation: IT sector sentiment improvement could lift valuations despite fundamentals
• Low Promoter Holding: At 14.4%, increases vulnerability to institutional selling pressure

Mitigation: Consider implementing stop-loss at ₹1,472 (first major resistance); reassess if growth metrics improve in upcoming quarters.

6. INVESTMENT CONCLUSION

• Recommended Action: Sell positions at current levels (₹1,420)
• Target Exit Price: ₹1,268 (fair value)
• Alternative Strategy: For existing holders, consider partial profit-taking and implementing trailing stop-loss
• Key Monitoring Metrics: Quarterly profit growth rate, ROCE trend, institutional ownership changes

The combination of decelerating growth, technical weakness, and valuation concerns makes Infosys unattractive at current levels despite its excellent financial health and strong cash flow generation.

Appendix: Calculation Details

Valuation Details

Fair Value Estimate

Based on a weighted average of DCF (₹1195.97), P/E (₹1286.40), P/B (₹1420.00), the fair value of Infosys Ltd is estimated at ₹1267.90 per share. This suggests a downside risk of 10.7% from the current price of ₹1,420. The overall rating is SELL.

DCF Valuation

The DCF model values Infosys Ltd at ₹1195.97 per share suggesting a downside risk of 15.8%. This valuation uses a 12.0% discount rate and assumes an initial growth rate of 10.0% that gradually decreases to a terminal growth rate of 4.0% by year 10.

Relative Valuation

Relative valuation methods suggest a fair value range of ₹1278.00 to ₹1562.00 per share, based on both P/E and P/B multiples.

Note: All financial values in model calculations are in crores unless otherwise specified.

Technical Analysis Details

Outlook: Bearish

Key factors:

• Weak momentum near 52-week low
• Negative moving average signals (3/3)

Support levels: ₹1,417.2, ₹1,395.2

Resistance levels: ₹1,440.95, ₹1,472.4, ₹1,533.6