Kotak Institutional Equities has issued a BUY recommendation for Infosys, India’s IT services behemoth, with a current market price of Rs 1,609 and a fair value target of Rs 1,780. The research highlights robust wage hikes for Indian employees, a continued deterioration in the employee pyramid, and mixed performance across key subsidiaries and acquisitions. While BPM revenues show moderate growth, McCamish faces a sharp revenue decline. Attrition has increased, particularly among younger staff. The report underscores a neutral sector outlook but maintains confidence in Infosys’ long-term prospects, citing healthy free cash flow and a strong balance sheet as key investor attractions.

Kotak Institutional Equities: BUY Call on Infosys

The research house Kotak Institutional Equities has put forth a BUY recommendation for Infosys (NSE: INFY), one of India’s leading IT services companies. The current market price stands at Rs 1,609, with a fair value target set at Rs 1,780, suggesting a potential upside for investors. The analysts cite a combination of robust wage growth, strong free cash flow generation, and a resilient business model as primary drivers for their positive outlook. The sector view is neutral, reflecting broader industry headwinds, but Infosys is positioned to outperform peers due to its scale and execution capabilities.

Robust Wage Hikes Amid a Challenging Environment

Despite a tepid demand landscape, Infosys managed to deliver an impressive 12% average wage hike for its Indian employees in FY2025. This figure, which factors in promotions and other event-based compensation revisions, significantly outpaces hikes observed in the previous two years. Analysts note that deferrals in wage increases during FY2024 and FY2025 may have contributed to this spike. The move underscores the company’s commitment to retaining top talent, even as the broader IT sector navigates global economic uncertainties and muted discretionary spending.

Employee Pyramid: A Cause for Concern

The employee pyramid at Infosys has deteriorated further in FY2025, reaching a multi-year low. Only 52.5% of employees are now under 30 years of age, a stark contrast to previous years when robust fresher hiring propped up this metric. The percentage of associates has also declined sharply, from 41.1% to 35.5%, while the mid-level workforce has expanded. This trend, if unchecked, could exacerbate talent pipeline issues, particularly if fresher hiring remains subdued for another year.

BPM Growth vs. McCamish Decline: A Tale of Two Segments

Infosys BPM Limited reported moderate revenue growth of 5.5% in US dollar terms, reaching US$1,005 million. This marks a slight improvement over the past two years, though it remains far below the double-digit growth rates seen between FY2019 and FY2022. In contrast, McCamish Systems LLC experienced a sharp revenue decline, driven entirely by lower sales of third-party software, while core revenues returned to FY2023 levels. This divergence highlights the volatile nature of Infosys’ business segments and the challenges of maintaining consistent growth across its portfolio.

Daimler Deal and German Subsidiary: Revenue Pressures

Revenues from the Daimler account, routed through Infosys Automotive and Mobility GmbH & Co. KG, declined to EUR390 million in CY2024 from EUR422 million in CY2023. The cost of software packages and other expenses fell even more sharply, by EUR71 million. It is important to note that this subsidiary does not capture all revenues from the Daimler account, as services delivered from India and other locations are accounted for separately. The decline underscores the challenges faced by Infosys in its European automotive vertical.

Consulting Subsidiaries: Mixed Results Across Geographies

Infosys’ key consulting subsidiaries in the UK, Germany, Switzerland, and Australia have delivered mixed results. The UK saw modest revenue growth, while Australia experienced a sharp improvement. However, revenues in Switzerland and Germany declined significantly. This patchy performance reflects the uneven recovery in global consulting demand and the impact of local economic conditions on Infosys’ overseas operations.

Attrition Trends: Youth Exodus and Geographic Shifts

Attrition rates have risen, with the most pronounced increase seen among employees under 30 years old. The voluntary IT services attrition rate for this group climbed to 16.4% in FY2025, up from 13.7% in FY2024. In contrast, attrition among employees aged 30-50 increased only marginally, and rates for those above 50 actually declined. Geographically, attrition in India rose by 190 basis points year-on-year, while rates remained stable or fell in other regions. High BPO attrition continues to be a drag, with total attrition (including BPO) at 20.6% in FY2024.

Acquisitions: A Mixed Bag of Outcomes

Infosys’ recent acquisitions under CEO Salil Parekh have been small but strategic, aimed at bolstering capabilities in experience, SaaS platforms, and BPO. Performance across these entities has been mixed, likely due to a subdued discretionary spending environment. Stater, for instance, posted a 3.9% revenue increase, driven by a large deal ramp-up. Wongdoody, however, saw a sharp 16.5% revenue decline. Kaleidoscope and HIPUS stood out with strong revenue growth, while Blue Acorn and Simplus experienced declines. The overall picture is one of selective success, with some acquisitions outperforming and others lagging.

Edgeverve: A Bright Spot in the Portfolio

Edgeverve, the subsidiary housing Infosys Finacle and other products, accelerated revenue growth to 12.2% in US dollar terms, reaching US$484 million in FY2025. This performance stands out in a landscape of mixed results, highlighting the potential of Infosys’ product-led growth strategy. The strong momentum in Edgeverve could serve as a blueprint for other business units seeking to diversify revenue streams and reduce reliance on traditional IT services.

Regional Headcount: Shifting Dynamics

The Americas region saw a 6.3% year-on-year decline in headcount, now accounting for just 6.6% of the total workforce. This suggests weaker relative performance in the region. Meanwhile, Indian employees continue to dominate, making up 83.6% of the workforce. The share of employees in APAC and EMEA increased marginally, reflecting Infosys’ ongoing efforts to diversify its geographic footprint and mitigate risks associated with over-reliance on any single market.

Training and Skill Development: Room for Improvement

Average training hours per employee declined to 71 in FY2025 from 75 in the previous year. This drop was most pronounced among junior and senior employees, while middle-level staff saw an increase. The reduction in training hours, particularly among younger employees, could have long-term implications for talent retention and skill development, especially as attrition rates rise in this cohort.

Financial Outlook and Valuation

Infosys is trading at a current market price of Rs 1,609, with a 52-week range of Rs 1,307 to Rs 2,007. The fair value target is set at Rs 1,780, implying a potential upside of over 10%. The company’s market capitalization stands at Rs 6,682 billion (US$78.1 billion). Earnings per share (EPS) are projected to grow from Rs 63.3 in FY2025 to Rs 72.4 in FY2027, with a dividend yield expected to rise from 3.0% to 3.8% over the same period. The price-to-earnings (P/E) ratio is forecast to decline from 25.4x to 22.2x, reflecting improving profitability and earnings growth.

Investment Recommendation and Target Levels

Kotak Institutional Equities maintains a BUY rating on Infosys, with a fair value target of Rs 1,780. The current market price of Rs 1,609 offers an attractive entry point for long-term investors, with potential upside supported by robust cash flows, a strong balance sheet, and a diversified business model. While sector headwinds persist, Infosys’ scale, execution track record, and strategic acquisitions position it well to navigate challenges and deliver shareholder value. Investors are advised to accumulate the stock at current levels, with a one-year horizon for the target price to be realized.