Was Infosys's solid Q1 performance a one-quarter wonder?

Mint

24-07-2025

Infosys Ltd surprised the Street with sequential constant-currency (CC) revenue growth of 2.6% in the June quarter (Q1FY26) driven by traction across most verticals and geographies. It also saw40 basis points (bps) of inorganic contribution from the acquisitions of MRE Consulting and The Missing Link.
Unlike in some earlier quarters, the quality of revenue generation improved, too, as growth was not driven by pass-through revenue this time. Revenuefrom the sale of third-party items bought for service delivery to clients is known aspass-through revenue.With this, Infosys significantly exceeded the consensus CC revenue growth estimate of 1.5% and outpaced its tier-1 peers.
The total contract value (TCV) for large deal wins declined 7% year-on-year to $3.8 billion in the quarter, but rose sequentially. Also, it was above the $2.4-2.6 billion range that Infosys clocked in recent quarters.Around 55% of the large-deal TCV was net new. Infosys closed 28 large deals in the quarter, with consolidation projects continuing to drive deal wins.
Ideally, strong Q1 revenue and healthy deal bookings should have led to an increase in guidance. But that did not entirely materialise. The macroeconomicenvironment is still uncertain owing to lingering trade tariffs and geopolitical concerns. Clients thus remain cautious on discretionary IT spending, leading to delayed decision making, management said.Banking and financial services verticalsaw healthy momentum, while hi-tech was weak, and manufacturing and retail were hit hardest by macro uncertainty. The stock declined 1.5% on Thursday.
Guidance revisions
While Infosys expects a stronger first half of FY26, the second half should see the usual seasonality. It has guided for FY26 CC revenue growth of 1%-3%, upgrading the lower end of guidance from 0 to 1% but leaving the upper end unchanged as it is currently not building in any macro improvement.
Also, organic revenue growth guidance was trimmed from 0-3% to 0.6-2.6%. On the face of it this cut at the upper-end appears to be negative, said analysts at JM Financial Institutional Securities.
Disappointingly, the guidance was revised despite positives such as productivity improvements from the enterprise AI platform aiding revenue trajectory and sequential improvement in deal wins. AI-driven productivity gains of 5-15% are being seen across client programmes, management said.
The Q1FY26 earnings before interest and tax (Ebit) margin of 20.8% was lower than the consensus estimate. However, if helps that the sequential margin drop was only 20 bps, despite absorbing wage hikes, higher variable pay, and investments in sales and marketing. Headwinds from currency movements and sales and marketing investments were offset by an increase in realisation due to Project Maximus and lower third-party costs. Infosys maintained operating margin guidance of 20-22% for FY26.
'Given salary increment for the entire workforce is done in the last two quarters, further hikes are unlikely in the next two-three quarters, we think. Lower third-party expenses will be a key tailwind for margins, which should help offset potential ramp-up costs of large deals in FY26," said Nomura Global Markets Research report dated 23 July. Nomura expects Ebit margin of 21.1% in FY26, flat year-on-year. TCS's Ebit margin expanded 30 bps sequentially in Q1FY26 to 24.5%, but it is yet to decide on wage hikes for FY26.
Meanwhile, Infosys shares have declined 15% over the past year, more than the 9.5% fall in the Nifty IT index.The stock trades at 21 times estimated FY27 earnings, almost at par with TCS and HCL, showed Bloomberg data. Unless macros improve meaningfully, the Q1 positives alone may not be enough to salvage FY26 performance as near-term catalysts for a sharp re-rating seem limited.