Infosys (NSE:INFY) Shares Gain 3.7% Despite Guidance Cut, Lifted by Sector Rebalancing

Infosys shares ended Monday, July 27, just under ₹1,079 in India, climbing around 3.7% on the day. The Nifty IT index gained 2.3%, compared to a 1.0% increase for the Nifty 50. Jefferies upgraded Indian tech services and included Infosys in its model portfolio. In New York, the company’s ADR settled close to $11.65, up about 4.9%. Indian shares were still trading 37.5% lower than their February 3 high. Reuters

In the fiscal first quarter, revenue stood at ₹48,211 crore, with net profit at ₹7,769 crore. Revenue fell short of the LSEG consensus by around 0.3%, while net profit was lower than the corresponding estimate by about 0.8%. Revenue in constant currency rose 2.4% annually and 1.0% from the previous quarter. The operating margin landed at 21.1%, and free cash flow totaled $955 million. The lowered annual guidance carried more weight than the slight misses in quarterly results. Reuters

Rupee revenue was up 14.0% in the quarter, while growth in dollar revenue stood at just 2.8%. Revenue growth at constant currency was slower still, reaching 2.4%. A significant portion of the rupee increase was driven by currency translation. North America and Europe accounted for a combined 88.5% of total quarterly revenue. Constant-currency data is a more accurate indicator of actual client demand. The headline 14% growth overstates the improvement in operations.

Infosys revised its constant-currency growth forecast to 1.5%-3.0%, down from a previous 1.5%-3.5% range. Executives pointed to restrained client budgets, lighter volumes, and underwhelming pricing trends. A discontinued client contract weighed on first-quarter growth by nearly 50 basis points. Acquisitions are projected to add around 1.7 percentage points for the year. By straightforward calculation, this implies an underlying organic growth rate from negative 0.2% up to positive 1.3%. This projection is approximate, as changes in the timing of acquisitions and base effects could impact actual contributions. Reuters

Operating margin for the first quarter stood at 21.1%, within the management’s maintained band. Utilization, excluding trainees, increased to 84.9% from 83.0% quarter-on-quarter. Offshore work made up 77.2% of the overall delivery effort. A one-off cost benefit contributed around 30 basis points. Salary hikes start in October, and the rest of the workforce will receive adjustments in January. The outlook stays achievable, but cost pressure is expected to intensify in the second half.

In the first quarter, AI services made up 8.2% of total group revenue. On $5.082 billion in sales, this amounts to about $417 million. By comparison, AI accounted for 5.5% of revenue in the December quarter. According to management, AI has posted double-digit sequential growth in several recent quarters. Infosys does not provide a standalone AI margin or a detailed breakdown of AI revenue. While AI is contributing a significant portion of growth, pricing may face pressure as clients seek productivity gains. Reuters

Large-deal contract value totaled $3.6 billion, with 61% categorized as net-new. Bookings increased sequentially from $3.2 billion, but declined compared to $3.8 billion in the previous year. Infosys secured 22 large deals, including three valued at $400 million each. Vendor-consolidation accounted for around 20% of total contract value. These bookings help maintain the pipeline, but revenue realization may require several quarters. Discretionary spending continues to be subdued. Reuters

North America accounted for 56.4% of total revenue, posting a 3.2% increase at constant currency. Europe made up 32.1% of revenue and advanced by 2.8%. Life sciences recorded the strongest performance, rising 24.0% compared to the previous year. Financial services revenue climbed 2.4%, contributing 27.9% of overall group revenue. Retail revenue fell 1.8%, and revenue from India dropped 4.2%. While the overall trend is upward, growth varies across segments.

Ashiss Kumar Dash will take on the role of chief executive starting April 1, 2027, pending shareholder approval for his five-year term. Dash has been with Infosys for over thirty years. Salil Parekh will continue as CEO until March 31, and the handover process starts in October. Naming an internal candidate limits short-term integration risk, though full responsibility will shift over time. The sell-off following the results cannot be attributed solely to the leadership news. Infosys

Free cash flow for the first quarter reached $955 million, representing 116.5% of net profit. Cash and investments amounted to $3.916 billion, declining from $4.542 billion in the previous quarter. Management reported dividend payments of over $1 billion for the period. Indian shares, priced at ₹1,079, were trading at roughly 14 times trailing earnings, with the trailing dividend yield indicated at approximately 4.45%. While the valuation appears restrained, subdued organic growth remains a contributing factor.