Infosys Q3 FY26: Margin Pressures Offset Revenue Growth as Stock Trades Below Key Moving Averages

The quarter's results present a mixed picture: whilst revenue growth remained healthy at 8.90% year-on-year, profitability came under pressure from rising employee costs and margin compression. The company's operating margin (excluding other income) contracted to 23.38% from 23.68% in the previous quarter, reflecting the ongoing challenges of balancing growth investments with profitability in a competitive talent market. Following the results, the stock has traded below all key moving averages, with technical indicators pointing to a mildly bullish trend after recovering from December lows.

Despite near-term margin pressures, Infosys continues to demonstrate strong fundamental quality with an exceptional return on equity of 27.22%, zero debt, and robust cash generation. The company's balance sheet remains fortress-like with ₹24,455.00 crores in cash as of March 2025, positioning it well for sustained capital allocation to shareholders through dividends and buybacks.

Financial Performance: Revenue Momentum Meets Margin Headwinds

In Q3 FY26, Infosys posted net sales of ₹45,479.00 crores, representing sequential growth of 2.22% and year-on-year expansion of 8.90%. This marks the seventh consecutive quarter of positive revenue growth, demonstrating the company's ability to capture market share in a recovering demand environment. However, the pace of growth has moderated from the robust 5.23% quarter-on-quarter expansion seen in Q2 FY26, suggesting some stabilisation in deal conversion cycles.

The profitability picture, however, presents more nuanced challenges. Consolidated net profit declined 9.64% sequentially to ₹6,654.00 crores, primarily driven by margin compression and a sequential decrease in profit before tax. Operating profit before depreciation, interest, and tax (excluding other income) grew to ₹10,634.00 crores, but the operating margin contracted 30 basis points to 23.38% from 23.68% in the previous quarter. This margin pressure reflects elevated employee costs, which rose to ₹24,122.00 crores in Q3 FY26 from ₹23,438.00 crores in Q2 FY26, as the company continues investing in talent acquisition and retention to service growing client demand.

The PAT margin also witnessed compression, declining to 14.66% from 16.58% in the previous quarter. This 192 basis point contraction was partly offset by a decline in the tax rate to 27.77% from 27.90%, but the overall profitability trend indicates that cost management remains a key area of focus. Other income provided some cushion, rising to ₹1,139.00 crores from ₹982.00 crores sequentially, benefiting from higher treasury yields on the company's substantial cash reserves.

On a year-on-year basis, the comparison is more favourable. Revenue growth of 8.90% outpaced the broader IT services sector, which delivered approximately 8% growth. However, the 2.23% decline in net profit year-on-year highlights the margin pressures that have intensified over the past year, as wage inflation and competitive talent dynamics have eroded some of the operating leverage gains from revenue growth.

Operational Excellence: Capital Efficiency Remains Industry-Leading Despite Margin Pressures

Infosys continues to demonstrate exceptional capital efficiency, with a return on equity (ROE) of 27.22% for the latest period, significantly above the peer group average of approximately 25%. This strong ROE, whilst slightly below the company's five-year average of 29.25%, underscores Infosys's ability to generate superior returns on shareholder capital even in a challenging margin environment. The company's return on capital employed (ROCE) stands at an impressive 52.69%, reflecting its asset-light business model and efficient deployment of capital.

The balance sheet remains a fortress of strength. As of March 2025, Infosys held zero long-term debt, maintaining its position as a net cash company with a net debt-to-equity ratio of -0.35. Cash and cash equivalents stood at ₹24,455.00 crores, providing substantial financial flexibility for strategic investments, acquisitions, and shareholder returns. The company generated robust operating cash flow of ₹35,694.00 crores in FY25, representing a 41.6% increase from the previous year, demonstrating strong cash conversion from operations.

Working capital management remains efficient, with the company reporting a modest outflow of ₹295.00 crores in FY25 compared to a substantial outflow of ₹5,082.00 crores in FY24. This improvement reflects better management of receivables and payables cycles. The company's current assets of ₹97,099.00 crores as of March 2025 comfortably cover current liabilities of ₹42,850.00 crores, providing a healthy current ratio of 2.27 and ensuring strong liquidity to meet short-term obligations.

Capital allocation has been shareholder-friendly, with Infosys maintaining a dividend payout ratio of 66.74% and declaring a dividend of ₹23.00 per share for the latest period, translating to a dividend yield of 2.88%. The company returned ₹24,161.00 crores to shareholders through dividends and buybacks in FY25, demonstrating its commitment to distributing excess cash whilst retaining sufficient capital for organic and inorganic growth opportunities.

Demand Environment: Navigating Client Budget Cycles and Digital Transformation Priorities

The IT services industry continues to navigate a complex demand environment characterised by cautious client spending, elongated deal closure cycles, and selective investment in digital transformation initiatives. Infosys's revenue growth of 8.90% year-on-year in Q3 FY26 suggests the company is successfully capturing market share in key verticals such as financial services, retail, and manufacturing, where digital transformation and cloud migration projects remain priorities despite broader economic uncertainties.

The company's total contract value (TCV) for deal wins, whilst not disclosed in the quarterly results, has historically been a key indicator of future revenue visibility. Infosys's ability to secure large multi-year transformation deals, particularly in areas such as cloud services, data analytics, and artificial intelligence, positions it well to sustain revenue momentum in coming quarters. However, the moderation in sequential revenue growth from 5.23% in Q2 FY26 to 2.22% in Q3 FY26 suggests that deal conversion cycles may be lengthening as clients exercise greater scrutiny over discretionary spending.

Geographically, Infosys derives a significant portion of its revenue from North America and Europe, regions that have experienced varied economic conditions. Whilst North American clients have shown resilience in spending, particularly in financial services and healthcare, European clients have been more cautious amid macroeconomic headwinds. The company's ability to diversify its revenue base across geographies and verticals will be critical to sustaining growth momentum in the medium term.

Industry Leadership: How Infosys Compares to Peers

Infosys trades at a price-to-earnings ratio of 23.05x, positioned in the middle of the peer group and below the industry average of 28x. This valuation appears reasonable given the company's strong ROE of 29.25%, which ranks second only to TCS's exceptional 43.49% amongst large-cap IT services peers. The company's price-to-book ratio of 6.27x is also moderate compared to TCS's premium 10.85x multiple, suggesting that the market is not fully pricing in Infosys's superior capital efficiency relative to some peers.

However, Infosys's dividend yield of 2.88% lags behind TCS (4.01%), Wipro (4.22%), and HCL Technologies (3.60%), reflecting a lower payout ratio relative to these peers. This could be viewed as a trade-off, with Infosys retaining more capital for growth investments and potential acquisitions, though it may be less attractive for income-focused investors seeking higher current yields.

The company's ROE of 29.25% significantly outperforms Wipro (16.48%), Tech Mahindra (16.46%), and HCL Technologies (22.67%), but trails TCS's industry-leading 43.49%. This gap suggests that whilst Infosys demonstrates strong capital efficiency, there remains room for improvement in asset utilisation and margin expansion to close the gap with the sector leader. The company's zero-debt balance sheet and negative net debt-to-equity ratio of -0.35 compare favourably with peers, providing greater financial flexibility and lower financial risk.

Valuation Analysis: Fair Pricing with Limited Upside at Current Levels

At the current market price of ₹1,599.05, Infosys trades at a price-to-earnings ratio of 23.05x based on trailing twelve-month earnings, representing a modest discount to the sector average of 28x but a premium to its own five-year historical average. The company's price-to-book ratio of 6.27x appears reasonable given its ROE of 27.22%, implying a price-to-book-to-ROE ratio of approximately 0.23, which is below the ideal threshold of 1.0 for quality growth stocks.

The company's PEG ratio of 3.36 suggests that the stock is trading at a significant premium to its growth rate, with the five-year sales growth of 12.37% and EBIT growth of 10.55% indicating moderate expansion rather than high-octane growth. This elevated PEG ratio implies that the market may be pricing in expectations of accelerated growth or margin recovery that have yet to materialise, creating potential downside risk if the company fails to meet these expectations.

The enterprise value-to-EBITDA multiple of 15.14x and EV-to-EBIT multiple of 17.19x are in line with historical averages for quality IT services companies, suggesting that the stock is fairly valued rather than offering a compelling entry point. The EV-to-sales multiple of 3.62x reflects the market's recognition of Infosys's strong profitability and cash generation, but also indicates limited room for multiple expansion unless the company can demonstrate sustained margin improvement or accelerated revenue growth.

Based on a discounted cash flow analysis using conservative assumptions of 10-12% revenue growth, stable margins, and a cost of equity of 12%, a fair value estimate for Infosys would be in the range of ₹1,550-1,650 per share, implying limited upside of approximately 0-3% from current levels. This valuation incorporates the company's strong balance sheet, consistent cash generation, and market leadership position, but also accounts for near-term margin pressures and moderating growth momentum.

Shareholding: Institutional Confidence Remains Robust Despite FII Selling

The shareholding pattern for December 2025 reveals a nuanced picture of institutional sentiment. Promoter holding increased marginally to 14.55% from 14.30% in the previous quarter, reflecting a modest reversal of the decline seen in September 2025. This uptick, whilst small, signals confidence from the founding promoters and key stakeholders in the company's long-term prospects despite near-term challenges.

Foreign institutional investor (FII) holding declined by 49 basis points to 29.58% in Q3 FY26, continuing a trend of gradual selling that has seen FII stakes fall from 33.30% in December 2024 to current levels. This reduction of nearly 372 basis points over the past year suggests that global investors have been trimming positions, potentially due to concerns about margin pressures, moderating growth, or portfolio rebalancing towards other sectors or geographies. However, FIIs remain substantial shareholders, indicating that the selling has been measured rather than panic-driven.

Mutual fund holdings showed a marginal decline of 5 basis points to 22.68%, following a significant increase of 187 basis points in the previous quarter. This stabilisation suggests that domestic mutual funds view current levels as fairly valued and are maintaining their positions rather than aggressively accumulating or distributing. The overall mutual fund stake of 22.68% represents strong institutional support and reflects the stock's inclusion in numerous large-cap and diversified equity funds.

Insurance companies reduced their holdings by 15 basis points to 15.53%, whilst other domestic institutional investors (DIIs) increased their stakes by 23 basis points to 3.50%. The combined institutional holding of 71.28% remains robust, providing a stable shareholder base and reducing volatility from retail investor sentiment. Non-institutional holdings increased by 22 basis points to 14.17%, suggesting some accumulation by retail investors and smaller institutional players who may view current levels as attractive for long-term investment.

Stock Performance: Underperformance Persists Amid Technical Weakness

Infosys shares have delivered a disappointing performance over the past year, declining 17.54% compared to the Sensex's 9.00% gain, resulting in a negative alpha of 26.54 percentage points. This significant underperformance reflects investor concerns about margin compression, moderating growth, and competitive pressures in the IT services sector. The stock has also underperformed its sector benchmark, the Computers - Software & Consulting index, which declined 15.75% over the same period, indicating company-specific challenges beyond broader sector headwinds.

Over shorter timeframes, the performance picture is more mixed. The stock has delivered positive returns of 7.33% over the past three months, outperforming the Sensex by 5.68 percentage points, suggesting some recovery momentum following the October-December 2025 lows. However, the one-week performance of -2.43% and year-to-date decline of 1.08% indicate that the recovery remains fragile and subject to near-term volatility.

From a technical perspective, the stock currently trades below all key moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day moving averages, indicating persistent weakness in price momentum. The stock is positioned approximately 19.34% below its 52-week high of ₹1,982.55 and 22.34% above its 52-week low of ₹1,307.10, suggesting it is trading in the middle of its annual range without clear directional bias.

The technical trend classification has recently shifted to "mildly bullish" as of December 22, 2025, following a period of bearish sentiment. However, mixed signals from technical indicators—with MACD showing weekly bullishness but monthly bearishness, and on-balance volume (OBV) indicating mildly bearish sentiment—suggest that the technical setup remains uncertain and vulnerable to renewed selling pressure if fundamental catalysts do not materialise.

Investment Thesis: Quality Business at Fair Valuation with Limited Near-Term Catalysts

The investment case for Infosys rests on a foundation of excellent business quality, characterised by exceptional return on equity of 27.22%, zero debt, and strong cash generation. The company's market leadership position, diversified client base, and focus on high-growth digital services provide a durable competitive moat. However, near-term challenges including margin pressures, moderating revenue growth, and elevated valuation multiples relative to growth rates temper the enthusiasm for aggressive accumulation at current levels.

The company's financial trend has been classified as "flat" for the most recent quarter, reflecting the stabilisation of key metrics but also the absence of meaningful acceleration in profitability or margin expansion. Whilst revenue growth remains healthy at 8.90% year-on-year, the decline in net profit and margin compression suggest that the company is navigating a challenging operating environment where top-line growth is not translating proportionately into bottom-line expansion.

From a technical standpoint, the recent shift to "mildly bullish" sentiment provides some comfort that the worst of the selling pressure may have abated. However, the stock's position below all key moving averages and mixed signals from technical indicators suggest that a sustained recovery will require fundamental catalysts such as margin stabilisation, improved deal wins, or positive management commentary on demand trends.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

Looking ahead, the key monitoring points for Infosys will centre on margin trajectory, deal win momentum, and demand environment commentary from management. Investors should watch for evidence of margin stabilisation or improvement in Q4 FY26, which would signal that the company has successfully navigated wage inflation pressures and is beginning to realise operating leverage from revenue growth. Any positive surprise on large deal wins or commentary indicating improving client spending sentiment would be viewed favourably by the market.

Conversely, red flags would include sustained margin erosion below 23%, sequential revenue growth decelerating further, or continued FII selling. A technical breakdown below the ₹1,500 level or a retest of the 52-week low of ₹1,307.10 would signal renewed bearish sentiment and potentially trigger further selling pressure. Management commentary on attrition rates, wage inflation trends, and client budget allocations will be critical inputs for assessing the company's ability to balance growth investments with profitability targets.