Infosys Ltd’s September quarter (Q2FY26) results had some bright spots, with sequential constant currency (CC) revenue growth of 2.2%, ahead of the 1.8% consensus estimate. Inorganic contributions added 20 basis points (bps). Revenue growth was broad based, led by hi-tech. While BFSI and manufacturing sectors also put up a decent show, retail was a pain point in Q2FY26 amid cautious client spending. Geographically, North America and Europe held-up with modest sequential growth, India re-bounded off a small base, but the Rest of World (RoW) region lagged.
The total contract value of larger deals at $3.1 billion was lower sequentially, but around 28% higher year-on-year. Net new deals accounted for $2.1 billion, or 67% of the total. This included 23 large deals with six in BFSI, four each in manufacturing, communications and retail, three in retail, among others. Region-wise, Infosys signed 14 large deals in North America, seven in Europe and one each in India and ROW. Still, the book-to-bill ratio at 0.6x in Q2FY26 indicates that deal conversion into revenue remains slow.
While execution efforts amid a weak demand environment helped Infosys sail through Q2FY26, H2FY26 is going to be slow. Infosys once again raised FY26 year-on-year CC revenue growth guidance to 2-3% from 1-3%. Remember, it had earlier raised this from 0-3% to 1-3% in Q1FY26. The revised guidance does not include any revenues from the newly signed joint venture with Telstra.
According to the management, while the deal pipeline remains strong, decision cycles remain elongated. So, the lower end of the revised guidance band assumes elevated levels of macro uncertainty, and the higher end assumes a stable environment, the management said. Also, this guidance takes into account the seasonality impacts in H2FY26 including lower working days, furloughs and calendar year transitions.
“The ask rate for the top end of guidance is negative 0.2% for the next two quarters, suggesting similar seasonality to previous years: we expect Q3 to remain flat, whereas Q4 revenue is anticipated to decline sequentially by 1.5%,” said Motilal Oswal Financial Services report dated 17 October.
Caution ahead
Earnings before interest and tax (Ebit) margin at 21% rose 20 basis points (bps) sequentially but was a tad lower than consensus estimate of 21.3%. Margin improvement during the quarter was driven by currency tailwinds and Project Maximus, which added 90 bps, offsetting higher sub-contractor and support costs.
“Lower third-party expenses will be a key tailwind for margins, which should help offset potential ramp-up costs of large deals in FY26F, in our view. We expect Ebit margins to remain stable at 21% (flat y-y) in FY26F vs the guided band of 20-22%,” said Nomura Global Markets Research report dated 17 October.
But as things stand, the risk of further earnings downgrades persists. Cautious commentary from the management, lower organic growth guidance, and lower third-party revenue will weigh on revenue growth, said Nirmal Bang Institutional Equities report on 17 October. “In the light of this, we have cut our revenue and earnings per share estimates for FY27/FY28 by 3.5%/5.2% and 4.1%/5.4% respectively,” added the report.
So far this calendar year, Infosys shares are down 23%, compared to a 19% decline in the Nifty IT index. At FY27 price-to-earnings, the stock trades at roughly 20x, according to Bloomberg data, hardly an attractive entry point given the downside risks. Close competitor Tata Consultancy Services is also trading at a similar valuation multiple.
