Infosys Stock Tumbles 15% YTD: Can AI Strategy and Favorable Valuation Spark a Turnaround?

Infosys, a leading IT services bellwether, has released its financial results for the second quarter of fiscal year 2026, revealing a mixed picture of modest growth alongside a strategic pivot towards Artificial Intelligence.

Key Financials and Guidance

• Revenue Growth: The company reported a 2.2 percent sequential revenue growth in Constant Currency (CC) for Q2 FY26. Year-on-year growth for the first half of the fiscal year stood at 3.3 percent in CC.
• Revised Outlook: Infosys has adjusted its full-year FY26 revenue growth guidance to 2-3 percent in Constant Currency, maintaining the upper end of its previous expectation. This recalibration, despite a decent first half and strong bookings, signals an anticipated softness in the second half, primarily due to seasonal factors like furloughs and fewer working days.
• Margin Performance: Operating margins saw a sequential improvement of 20 basis points, reaching 21 percent in Q2. However, given the subdued H2 outlook, significant margin improvement is not expected for the remainder of the year. The FY26 margin guidance remains unchanged at 20-22 percent.

Deal Wins and AI Focus

• Deal Pipeline: Large deal inflows were steady in Q2, with 23 deals signed, 67 percent of which were net new. This inflow saw a 24 percent year-on-year growth but was lower compared to the preceding quarter.
• Mega Deal: A significant development announced post the end of Q2 was a $1.6 billion mega deal secured with the UK's National Health Service (NHS).
• Enterprise AI Ambitions: Infosys is actively working towards becoming a leading Enterprise AI provider. The company views AI as a key driver for future growth, productivity enhancement, and cost savings for its enterprise clients.
• Topaz Suite: Its proprietary AI stack, the Topaz suite, coupled with full-stack application services capabilities, is expected to be a crucial differentiator as clients increasingly scale their modernization and AI programs.

Stock Performance and Valuation

• Market Underperformance: The Infosys stock has experienced a prolonged period of underperformance, being down more than 15 percent year-to-date. It has lagged behind not only the benchmark Nifty but also the broader IT Index.
• Attractive Valuation: Currently, Infosys is trading at 22.7 times its estimated FY26 earnings, which represents a discount to its 5-year average valuation. Factors like the steady depreciation of the Indian currency and outflows of Foreign Institutional Investor (FII) funds are also noted.
• Favorable Risk-Reward: Considering the current valuation and market conditions, analysts perceive the risk-reward profile for Infosys as having turned favorable, with expectations of limited downside despite the seasonally soft upcoming quarter (Q3).

Future Expectations

• The company's strategic emphasis on AI is poised to capitalize on the growing demand for AI-led services.
• Execution of large deals, especially the NHS contract, and the adoption of its Topaz suite will be critical for its future growth trajectory.

Impact

• This news is significant for Infosys shareholders and the broader Indian IT sector, influencing investor sentiment and strategic decisions. The company's ability to leverage AI effectively will be closely watched.
• Impact Rating: 7

Difficult Terms Explained

• Constant Currency (CC): A financial reporting method that excludes the effects of foreign exchange rate fluctuations, providing a clearer view of underlying business performance.
• Sequential Growth: Compares a company's performance from one reporting period to the immediately preceding period (e.g., Q2 FY26 compared to Q1 FY26).
• Year-on-Year (YoY) Growth: Compares a company's performance over the same period in the previous year (e.g., Q2 FY26 compared to Q2 FY25).
• Basis Points (bps): A unit of measure equal to one-hundredth of a percent (0.01%). Used to describe small changes in percentages, such as margin improvements.
• FY26e: Refers to the estimated earnings for the Fiscal Year 2026.
• FII (Foreign Institutional Investor): An overseas entity, such as a mutual fund or pension fund, that invests in securities in India.