Infosys

Infosys' first-quarter sequential revenue growth of 1% topped our Indian IT coverage. Operating margin was resilient at 21% amid tight enterprise IT spending. Partnership with model providers drove rapid expansion of Infosys' AI revenue, now accounting for 8% of total revenue.

Why it matters: Besides healthy top-line growth, Infosys' forward-looking metrics looked slightly better than peers. 61% of the $3.6 billion in large deal wins were net new. Employee net utilization also improved 200 basis points sequentially, thanks to the outstanding execution of Project Maximus. Multiple industry groups saw their growth tapering due to continued delays in decision-making, and macro remained a key factor in enterprise IT procurement. Technology and Life Sciences were the only two groups posting sequential improvements in constant-currency revenue growth. As the termination of a major client led to a one-off 50-basis-point revenue growth headwind this quarter, management pointed out that intensifying competitiveness across the market has led to softer price increases than initially expected.

The bottom line: We maintain our USD fair value estimate at USD 14.10 for narrow-moat Infosys, and raise our INR fair value estimate by 30 rupees to INR 1,360 to account for a weakening Indian rupee. Shares currently look undervalued. Infosys' stable contract duration of between three and seven years reaffirmed our view that the company still enjoys high switching costs in the AI era. Early traction with Infosys Topaz Fabric should give Infosys future upsell opportunities when clients gradually realize their returns. Solid results from Project Maximus mean that Infosys' efficiency gains should protect its margin against pricing pressures.

Coming up: Management trimmed its full-year revenue outlook to 1.5%-3.0%, from 1.5%-3.5% previously, due to the customer loss and a tougher pricing environment. Full-year operating margin guidance of 20%-22% remains unchanged.

During the earnings call, Infosys' board of directors also announced that the current CEO, Salil Parekh, is going to step down at the end of his term in March 2027. Ashiss Dash, a 31-year Infosys veteran, will become the new CEO for the company. We like the continuity with Infosys' new CEO appointment, as the company is at a pivotal moment to solidify its position within the enterprise AI ecosystem. Dash has experience across both service delivery and account management. We do not expect to see major strategy changes with this new CEO appointment.

Our fair value estimate for Infosys is $14.10 per share, which implies an adjusted price/earnings ratio of 18 times and an enterprise value/adjusted EBITDA ratio of 10 times. We model a 5% cumulative annual growth rate for Infosys over the next five years, driven by both enterprises’ secular IT upgrade demand and penetration of Infosys’ competitive cloud- and AI-based solutions for enterprises.

Infosys has accumulated many new client relationships in Europe, and we think European customers are generally more open to outsourcing their IT needs to offshore service providers after the pandemic. Therefore, Infosys’ client relations in the European market should continue to be an important piece of the company’s growth story. The majority of our forecast top-line growth should come from organic channels, as Infosys follows a prudent investment strategy focusing on bolt-on acquisitions. We think Infosys’ cloud and AI solutions are both attractive to customers looking to modernize their workflows with advanced digital tools. The number of major customer spending at least $50 million annually with Infosys should grow as enterprises introduce agentic AI into their workflows. We do not foresee material changes in Infosys’ labor force dynamics. Employee voluntary attrition should remain in the low teens, and consultant net utilization should stabilize around 85% over the long term.

Similar to other IT consulting companies, Infosys’ margin should remain largely stable over the next five years, with gross margin and operating margin both expanding around 100 basis points during the period. Infosys’ higher-value system integration and application management services should gain traction over the next few years, given the competitiveness of Infosys’ cloud and AI solutions. However, increased labor costs and commoditization for its business process outsourcing unit can offset the majority of the margin gains.

We assign Infosys a narrow economic moat based on the switching costs and cost advantage it enjoys. Infosys’ history in IT services is shorter than its larger counterparts, Tata Consultancy and Accenture. However, over the past three decades, Infosys has been expanding its suite of services in consulting, application management, system integration, and business process outsourcing. We believe these expanded offerings help the company develop a larger footprint with major customers, which reinforces switching costs. Meanwhile, Infosys’ cost advantage lies with its effective leverage of Indian-based labor that allows the company to consistently post higher margins than most of its peers.

We think a narrow moat rating best reflects our take that Infosys is more likely than not to maintain its return on invested capital above the cost of capital over the next 10 years. Despite Infosys’ competitive advantages, generative artificial intelligence has the potential to disrupt knowledge-based work, including IT services. Areas where IT consultants provide services are under threat, such as application development and business process outsourcing, or BPO. We expect IT services firms to see AI headwinds from the loss of billable hours due to software engineering efficiency gains and AI-native systems' gradual replacement of offshore labor across key BPO workflows. This prevents us from assigning Infosys with a wide moat rating.

Infosys began as an IT consultant focusing on offshore software development, where it creates new applications to support clients’ specific workflows. When a client contracts an IT services provider to develop a custom application, it indicates that existing general-purpose software on the market cannot adequately meet the client’s needs, and extra investment is necessary to create a new application for the specific business process.

When a custom application suffers from significant downtime due to poor design or improper maintenance, it can lead to severe business disruption and significant costs. Therefore, customers without robust in-house IT capabilities are willing to outsource this part of work to IT services companies. Those who already work with one IT services company to develop a custom application are unlikely to transition the project to another company, as the new vendor might run into difficulties providing ongoing software maintenance due to the unfamiliarity with the underlying technology. To bring the new provider up to speed, the ramp-up process would require additional time and resources, depending on the technologies that the new vendor is proficient in. Although new AI-based coding tools like Claude Code fundamentally shifted the time and cost needed for new software development, we still see a reason for the majority of enterprises to work with IT services companies for custom application development, such that the quality of code and security protocols implemented are optimized to meet their specific business needs.

Furthermore, Infosys’ robust recent performance in Europe makes a solid case for its switching costs. During the pandemic, many European companies, which are historically more hesitant to outsource their IT needs, stepped up their India-based IT labor usage. As a result, Infosys recorded outstanding revenue growth of above 20% in the European market for fiscal years 2022 and 2023. However, as European IT talent supply gradually returned to normal in fiscal years 2024 and 2025, Infosys was still able to enjoy a cumulative annual growth rate of 9.6% in Europe, which was 890 basis points higher than Tata Consultancy and 1670 basis points higher than Wipro. We believe the divergence of postpandemic performance across Indian IT consulting firms in Europe highlights that Infosys can leverage its existing client relations to grow its presence in a new market. As Infosys rolls out additional IT services offerings to European customers, we expect stronger lock-in effects that support the company’s robust performance.

Besides switching costs, cost advantage is another crucial factor that contributes to Infosys’ high return on invested capital. Around 85% of Infosys employees are based in India, which benefits the company through salary arbitrage. Infosys’ operating margin has been stable above 20% over the past 10 years, significantly higher than that of other IT services companies, including Cognizant and Capgemini, that leverage offshore labor on a smaller scale. Similar to Tata Consultancy, we think Infosys’ salary arbitrage has reached a point where the company has established an enduring competitive advantage reflected through higher margins.

We recognize the progress Infosys has achieved in expanding its branded digital solutions, but we do not think Infosys’ intangible assets are strong enough to support an economic moat at the moment. Infosys’ cloud and AI-based service offerings, such as Infosys Cobalt and Infosys Topaz, are moderately ahead of what other Indian IT consulting firms can offer. However, enterprise AI deployment is still in its very early stages. It is not immediately clear to us how Infosys can establish an enduring leadership in cloud and AI. Also, Infosys is a relatively new player in the consulting space. The lack of direct access to C-suites can pose a challenge for Infosys to build a lasting competitive advantage based on intangible assets.

Infosys’ comprehensive cloud and AI digital solutions can help the company capture the tailwind of increasing enterprise AI demand.

Infosys’ client relationships in Europe and emerging markets provide a basis for further business expansion in these new regions.

As Infosys continues to expand its capabilities, the company is ready to handle large-scale projects that have better unit economics.

Continued geopolitical uncertainty and economic volatility can influence enterprise IT spending and weigh on Infosys’ performance.

Infosys’ margins can face pressure as a result of continuous wage hikes in India and higher hurdles to move tech talent on a global scale for on-site work.

Expansion of AI-based system integration services can cannibalize Infosys’ business process outsourcing business as AI agents replace consultants to handle certain workflows.