The September quarter results showcased Infosys's ability to deliver consistent growth in a challenging global IT spending environment. Net sales for Q2 FY26 reached ₹44,490.00 crores, up 5.23% sequentially from ₹42,279.00 crores in Q1 FY26 and 8.55% higher year-on-year. This acceleration in revenue growth reflects strong deal execution and improving client engagement across key markets. However, the company's operating margin of 23.68%, whilst showing a modest 16 basis point sequential improvement, remains under pressure from elevated employee costs and competitive pricing dynamics in the IT services sector.
Financial Performance: Navigating Growth Amidst Cost Pressures
Infosys's Q2 FY26 financial performance demonstrates the company's operational resilience, with net profit margins holding steady at 16.58%, marginally above the 16.38% recorded in Q1 FY26 but below the 17.20% achieved in Q4 FY25. The sequential profit growth of 6.40% outpaced revenue growth of 5.23%, indicating improved operational leverage. On a year-on-year basis, the 13.19% profit growth significantly exceeded the 8.55% revenue growth, reflecting better cost management and operational efficiency gains.
Employee costs, the largest expense item for IT services companies, stood at ₹23,438.00 crores in Q2 FY26, up 2.59% sequentially and 8.69% year-on-year. This increase aligns with the company's revenue growth trajectory and reflects ongoing investments in talent acquisition and retention amidst a competitive labour market. Operating profit before depreciation, interest, tax and other income (PBDIT excluding OI) reached ₹10,535.00 crores, up 5.95% quarter-on-quarter and 7.40% year-on-year, with the operating margin at 23.68% showing marginal expansion from 23.52% in the previous quarter.
| Quarter | Net Sales (₹ Cr) | QoQ Growth | Net Profit (₹ Cr) | QoQ Growth | Operating Margin | PAT Margin |
|---|---|---|---|---|---|---|
| Sep'25 | 44,490 | 5.23% | 7,364 | 6.40% | 23.68% | 16.58% |
| Jun'25 | 42,279 | 3.31% | 6,921 | -1.59% | 23.52% | 16.38% |
| Mar'25 | 40,925 | -2.01% | 7,033 | 3.34% | 24.13% | 17.20% |
| Dec'24 | 41,764 | 1.90% | 6,806 | 4.61% | 24.22% | 16.33% |
| Sep'24 | 40,986 | 4.25% | 6,506 | 2.17% | 23.93% | 15.90% |
| Jun'24 | 39,315 | 3.67% | 6,368 | -20.09% | 24.00% | 16.21% |
| Mar'24 | 37,923 | -2.31% | 7,969 | 30.51% | 23.16% | 21.03% |
| Dec'23 | 38,821 | -0.44% | 6,106 | -1.71% | 23.54% | 15.75% |
Other income for Q2 FY26 stood at ₹982.00 crores, down from ₹1,042.00 crores in the previous quarter but significantly higher than the ₹712.00 crores recorded in Q2 FY25. The company's tax rate for the quarter was 27.90%, slightly lower than the 28.91% in Q1 FY26, contributing to the improved bottom-line performance. The effective tax management, combined with operational efficiency, enabled Infosys to deliver strong earnings growth despite margin headwinds.
Operational Excellence: Industry-Leading Returns on Capital
Infosys continues to demonstrate exceptional operational excellence, reflected in its industry-leading return on equity (ROE) of 28.72% for Q2 FY26. This metric, which measures how efficiently a company generates profits from shareholder equity, places Infosys well above the industry average and underscores the company's superior capital efficiency. The five-year average ROE of 30.48% further reinforces the consistency of this performance, highlighting Infosys's ability to generate sustainable returns for shareholders over time.
The company's return on capital employed (ROCE) stands at an impressive 51.10%, with a five-year average of 50.43%, indicating highly efficient utilisation of capital resources. This exceptional ROCE is supported by Infosys's zero-debt capital structure, which eliminates interest burden and provides financial flexibility for growth investments. The company maintains a net cash position of ₹36,937 crores, with total cash and cash equivalents of ₹24,455 crores as of March 2025, providing a strong cushion for strategic initiatives and shareholder returns.
Financial Fortress: Zero-Debt Balance Sheet
Infosys operates with zero debt, maintaining a pristine balance sheet that provides significant strategic flexibility. With shareholder funds of ₹95,818 crores as of March 2025 and a net cash position exceeding ₹36,000 crores, the company enjoys one of the strongest financial positions in the Indian IT sector. This financial strength enables Infosys to invest aggressively in growth opportunities, pursue strategic acquisitions, and maintain generous shareholder returns through dividends and buybacks without compromising operational flexibility.
The company's balance sheet strength is further evidenced by its asset quality, with total current assets of ₹84,617 crores as of March 2025, comfortably exceeding current liabilities of ₹42,850 crores. This provides a current ratio of approximately 1.97, indicating robust short-term liquidity. Fixed assets stood at ₹24,650 crores, reflecting ongoing investments in infrastructure and capabilities to support future growth.
Industry Context: Navigating Subdued IT Spending Environment
The global IT services industry has faced headwinds from macroeconomic uncertainties, with clients across North America and Europe adopting cautious spending approaches. Despite these challenges, Infosys has managed to outperform many peers through strong execution and strategic positioning in high-growth areas such as cloud transformation, digital services, and artificial intelligence. The company's 8.55% year-on-year revenue growth in Q2 FY26 compares favourably with the broader IT sector, which has witnessed more muted growth rates.
Infosys's five-year revenue compound annual growth rate (CAGR) of 12.36% demonstrates consistent market share gains and successful navigation of multiple business cycles. The company's focus on large deal wins, expanding client relationships, and deepening industry expertise has enabled it to maintain growth momentum even during periods of sector-wide weakness. The quarterly revenue trajectory shows gradual acceleration, with Q2 FY26 marking the fourth consecutive quarter of sequential revenue growth.
Margin Dynamics: Balancing Growth and Profitability
Whilst Infosys has delivered strong revenue and profit growth, operating margins remain a key area of focus. The Q2 FY26 operating margin of 23.68%, though improved sequentially, is below the peak levels achieved in previous years. Employee cost inflation, competitive pricing pressures, and investments in emerging technologies continue to constrain margin expansion. The company's ability to balance growth investments with margin improvement will be critical for sustaining premium valuations and meeting investor expectations in coming quarters.
Peer Comparison: Premium Valuation Justified by Superior Returns
Infosys commands a premium valuation relative to many IT sector peers, trading at a price-to-earnings (P/E) ratio of 22.46 times trailing twelve-month earnings and a price-to-book (P/BV) ratio of 6.45 times. This valuation premium is justified by the company's superior return on equity of 28.72%, which significantly exceeds the peer group average and reflects Infosys's ability to generate higher returns on shareholder capital.
| Company | P/E (TTM) | P/BV | ROE (%) | Dividend Yield (%) | Debt to Equity |
|---|---|---|---|---|---|
| Infosys | 22.46 | 6.45 | 28.72 | 2.92 | -0.28 |
| TCS | 21.36 | 1.01 | 4.73 | 4.65 | -0.48 |
| HCL Technologies | 23.93 | 0.57 | 2.38 | 4.01 | -0.36 |
| Wipro | 19.48 | 3.18 | 15.95 | 4.39 | -0.41 |
| LTI Mindtree | 35.32 | 7.34 | 20.26 | 1.16 | -0.39 |
Compared to Tata Consultancy Services (TCS), which trades at a P/E of 21.36 times but delivers an ROE of just 4.73%, Infosys's valuation appears reasonable given its significantly higher capital efficiency. Similarly, HCL Technologies trades at a P/E of 23.93 times with an ROE of only 2.38%, making Infosys's valuation multiple more attractive on a return-adjusted basis. Wipro, with an ROE of 15.95% and P/E of 19.48 times, offers a lower valuation but also delivers materially lower returns on equity.
Infosys's dividend yield of 2.92% is lower than most peers, reflecting the company's higher valuation and lower payout ratio. However, the company has consistently returned cash to shareholders through both dividends and share buybacks, with a five-year average dividend payout ratio of 66.74%. The latest dividend of ₹22 per share demonstrates the company's commitment to shareholder returns whilst maintaining flexibility for growth investments.
Valuation Analysis: Fair Value Amidst Sector Weakness
At the current price of ₹1,472.75, Infosys trades at a P/E ratio of 22.46 times trailing twelve-month earnings, which is broadly in line with its historical average and represents a fair valuation given the company's quality metrics and growth profile. The stock's price-to-book ratio of 6.45 times, whilst elevated in absolute terms, is justified by the company's exceptional ROE of 28.72%, which is among the highest in the Indian IT sector.
The company's enterprise value (EV) to EBITDA multiple of 14.73 times and EV to sales ratio of 3.53 times reflect the market's recognition of Infosys's strong cash generation and operational efficiency. However, the PEG ratio of 10.06 times suggests that the current valuation may not fully capture the company's growth potential, particularly if revenue growth accelerates in response to improving demand conditions.
Valuation Dashboard
P/E Ratio (TTM): 22.46x | P/BV Ratio: 6.45x | Dividend Yield: 2.92% | Overall Assessment: FAIR
The stock's valuation changed from "Attractive" to "Fair" on 02 June 2025 at ₹1,554.20, reflecting the market's reassessment of growth prospects amidst sector-wide challenges. Despite the recent price correction, the stock remains fairly valued based on current fundamentals and peer comparisons.
Shareholding Pattern: Stable Institutional Base with Modest Changes
Infosys's shareholding pattern reflects strong institutional confidence, with total institutional holdings at 71.54% as of June 2025. Foreign institutional investors (FIIs) hold 31.92% of the company's equity, down marginally by 0.96 percentage points from 32.88% in March 2025, indicating some profit-booking by overseas investors amidst the stock's price correction. Despite this modest decline, FII holdings remain substantial, underscoring continued international investor interest in India's IT sector bellwether.
| Shareholder Category | Jun'25 | Mar'25 | Dec'24 | QoQ Change |
|---|---|---|---|---|
| Promoter Holding | 14.61% | 14.60% | 14.43% | +0.01% |
| FII Holding | 31.92% | 32.88% | 33.30% | -0.96% |
| Mutual Fund Holding | 20.86% | 20.45% | 20.05% | +0.41% |
| Insurance Holdings | 15.72% | 15.25% | 15.49% | +0.47% |
| Other DII Holdings | 3.04% | 2.84% | 2.85% | +0.20% |
| Non-Institutional | 13.86% | 13.98% | 13.88% | -0.12% |
Domestic institutional investors have shown increasing conviction, with mutual fund holdings rising to 20.86% in June 2025 from 20.45% in March 2025, an increase of 0.41 percentage points. Insurance companies also increased their stake to 15.72% from 15.25%, adding 0.47 percentage points, suggesting that long-term domestic investors view the current price levels as attractive entry points. Promoter holding remains stable at 14.61%, with no pledging of shares, reflecting the founding family's continued confidence in the company's prospects.
Stock Performance: Significant Underperformance Amidst Sector Weakness
Infosys shares have significantly underperformed both the broader market and the IT sector over the past year, declining 23.25% compared to the Sensex's 2.41% gain, resulting in a negative alpha of 25.66 percentage points. Year-to-date performance has been even more challenging, with the stock down 21.69% against the Sensex's 6.82% gain, translating to a negative alpha of 28.51 percentage points. This underperformance reflects sector-specific headwinds, margin concerns, and profit-booking after the stock's strong run in previous years.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -2.43% | 1.58% | -4.01% |
| 1 Month | -2.55% | 1.32% | -3.87% |
| 3 Months | -8.45% | 1.01% | -9.46% |
| 6 Months | 4.23% | 8.34% | -4.11% |
| YTD | -21.69% | 6.82% | -28.51% |
| 1 Year | -23.25% | 2.41% | -25.66% |
| 2 Years | 2.67% | 26.15% | -23.48% |
| 3 Years | -0.09% | 44.11% | -44.20% |
The stock's technical indicators paint a bearish picture, with the current trend classified as "Bearish" as of 15 October 2025. The stock is trading below all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day moving averages, indicating sustained selling pressure. The 52-week high of ₹2,006.80 is now 26.61% above the current price, whilst the 52-week low of ₹1,307.10 provides support just 12.67% below current levels.
Despite the near-term weakness, Infosys has delivered respectable long-term returns, with a 10-year return of 169.30%, though this still lags the Sensex's 206.70% gain over the same period. The stock's beta of 1.00 indicates that it generally moves in line with the broader market, making it a medium-risk investment from a volatility perspective.
Investment Thesis: Quality Company at Fair Valuation
Infosys presents a compelling investment case built on three pillars: exceptional quality, fair valuation, and improving financial trends. The company's quality grade of "Excellent" reflects its pristine balance sheet, industry-leading returns on capital, consistent profitability over 10+ years, and strong cash generation capabilities. With zero debt, an ROE of 28.72%, and ROCE exceeding 50%, Infosys demonstrates superior capital efficiency compared to most peers.
The company's financial trend is classified as "Positive" as of December 2024, supported by consistent quarterly profit growth and improving operational metrics. Whilst the technical trend remains bearish in the near term, the fundamental strength of the business provides a solid foundation for long-term value creation. The company's valuation is assessed as "Fair," neither expensive nor cheap, reflecting the market's balanced view of growth prospects and execution risks.
"With industry-leading ROE of 28.72%, zero debt, and consistent execution, Infosys remains a quality franchise navigating near-term headwinds whilst maintaining long-term value creation potential."
Key Strengths & Risk Factors
Key Strengths
- Exceptional Capital Efficiency: ROE of 28.72% and ROCE of 51.10% demonstrate superior returns on shareholder capital
- Zero-Debt Balance Sheet: Net cash position of ₹36,937 crores provides financial flexibility for growth and shareholder returns
- Consistent Growth Track Record: Five-year revenue CAGR of 12.36% with sustained profitability through multiple cycles
- Strong Institutional Backing: 71.54% institutional holdings reflect confidence from sophisticated investors
- Industry Leadership: Second-largest IT services provider in India with global client relationships
- Healthy Cash Generation: Operating cash flow of ₹35,694 crores in FY25 supports dividends and investments
- No Promoter Pledging: Zero pledged shares indicate strong promoter confidence
Key Concerns
- Margin Pressures: Operating margins of 23.68% below peak levels, facing headwinds from employee cost inflation
- Bearish Technical Trend: Stock trading below all key moving averages with sustained selling pressure
- Significant Price Correction: Down 23.25% over past year, underperforming Sensex by 25.66 percentage points
- Elevated PEG Ratio: PEG of 10.06 suggests limited upside at current valuation relative to growth
- Sector Headwinds: Global IT spending weakness impacting demand environment
- FII Selling: Foreign institutional holdings declined 0.96 percentage points in recent quarter
- Lower Dividend Yield: 2.92% yield below peer average, limiting income appeal
Outlook: What to Watch in Coming Quarters
Positive Catalysts
- Acceleration in large deal wins and total contract value
- Margin expansion through operational efficiency and automation
- Recovery in discretionary IT spending from key clients
- Continued growth in high-margin digital and cloud services
- Potential for increased buyback or special dividend given strong cash position
Red Flags
- Further deterioration in operating margins below 23%
- Slowdown in revenue growth momentum
- Continued FII selling and institutional exodus
- Breach of 52-week low at ₹1,307 on sustained basis
- Significant client concentration or loss of major accounts
Looking ahead, Infosys's ability to sustain revenue growth whilst expanding margins will be critical for re-rating the stock. The company's strong deal pipeline, investments in emerging technologies such as artificial intelligence and generative AI, and focus on cost optimisation provide reasons for cautious optimism. However, the near-term outlook remains clouded by macroeconomic uncertainties and competitive pressures that could constrain margin expansion.
For existing shareholders, the company's strong fundamentals, excellent quality metrics, and consistent execution provide reasons to maintain positions despite near-term volatility. The dividend yield of 2.92%, whilst modest, provides some downside protection, and the company's track record of shareholder-friendly capital allocation through dividends and buybacks adds to the investment case. Fresh investors may consider accumulating positions gradually, given the fair valuation and long-term growth potential, though patience will be required as the stock works through its current bearish technical phase.
The Verdict: Quality Franchise Navigating Cyclical Headwinds
Score: 54/100
For Fresh Investors: Consider gradual accumulation at current levels given fair valuation and excellent quality metrics, but be prepared for near-term volatility. The stock's 23.25% correction over the past year has brought valuations to reasonable levels, though the bearish technical trend suggests patience is warranted.
For Existing Holders: Continue to hold. The company's strong fundamentals, zero-debt balance sheet, and industry-leading ROE of 28.72% provide a solid foundation for long-term value creation despite near-term margin pressures and sector weakness.
Rationale: Infosys combines exceptional quality (excellent grade), fair valuation (P/E 22.46x), and improving financial trends (positive quarterly results), but faces near-term headwinds from bearish technical momentum and sector-wide challenges. The company's strong cash generation, consistent execution, and market leadership position it well for the next growth cycle, though investors should expect continued volatility before a sustained recovery materialises.
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
