- Margin dip, not doom: The 40bps margin miss is offset by a booming AI order book.
- Revenue outlook brightens: FY27 revenue growth projected at 4.7% YoY, up from 3.8% earlier.
- Hiring pace outpaces revenue: Headcount growth of 4.2% versus 3.3% revenue growth signals confidence.
- Valuation steady: Target price remains INR 1,630, implying a 21x forward P/E.
- Peer pressure: Tata Consultancy Services and Wipro are adjusting strategies; Infosys’s AI focus could be a differentiator.
You missed the fine print on Infosys’s Q3 numbers – and that could cost you.
Why Infosys's Margin Slip Aligns With Industry Trends
Infosys reported a marginal beat on revenue but fell short on margins, even after stripping out a one‑off 40 basis‑point gain from a property sale. The headline‑level miss is easy to flag, yet the underlying story is more nuanced. Across the Indian IT sector, companies are allocating higher‑margin resources to AI‑centric projects, which often involve upfront talent investments and longer sales cycles. This temporary compression is a common early‑stage symptom when firms pivot toward higher‑value services.
In the broader tech services landscape, margin pressure has been observed at peers such as Tata Consultancy Services (TCS) and Wipro during similar strategic shifts. The key takeaway is that a short‑term dip does not automatically translate into long‑term erosion; instead, it can precede a structural upgrade in the revenue mix.
How AI‑Led Demand Is Re‑shaping the Indian IT Landscape
The research note highlights an “uptick in AI‑led discretionary demand” from financial services, energy, resources, and utilities. This is not a fleeting trend. According to NASSCOM, AI‑related services are projected to grow at a CAGR of 18% through 2027, outpacing overall IT services growth of 9%.
Infosys’s order book jumped 30% YoY in the first nine months of FY25, a clear indicator that clients are willing to spend more on AI‑enabled solutions. The firm’s “AI Foundry” platform and the recent partnership with major cloud providers are expected to translate into higher‑margin contracts, which will gradually lift EBIT margins in FY27‑FY28.
What Competitors Tata Consultancy and Wipro Are Doing Differently
TCS has leaned heavily on its “Digital Business Services” (DBS) arm, reporting a 7% margin expansion in FY26. Wipro, on the other hand, has accelerated its “Automation and Cloud” initiatives, targeting a 5% margin uplift by FY28. Both firms are expanding headcount faster than revenue growth, mirroring Infosys’s recent hiring trend of 4.2% YoY.
The differentiator lies in execution speed. Infosys’s AI pipeline is still in a “growth acceleration” phase, whereas TCS’s DBS is already delivering sizable margin accretion. Investors should watch the pace of order‑book conversion into billable work to gauge which player gains the upper hand.
Historical Parallel: The 2016 IT Cycle and What It Teaches
In FY17, Infosys experienced a similar margin dip as it ramped up its Cloud and Analytics practice. The company’s revenue growth slowed to 3.5% YoY, but the strategic shift paid off when AI‑driven engagements surged in FY19, delivering a 9% margin expansion over two years.
The pattern suggests that temporary margin compression can be a leading indicator of a forthcoming earnings acceleration, provided the firm maintains disciplined execution and capitalizes on emerging demand.
Technical Snapshot: Decoding the P/E Multiple and EPS Forecast
ICICI Securities maintains a target price of INR 1,630, derived from a forward P/E of 21x based on the December 2027 estimated EPS of INR 78. The 21x multiple reflects a modest premium over the sector average of 19x, factoring in Infosys’s AI growth catalyst and its strong order‑book momentum.
For context, a P/E multiple is calculated as Market Capitalization ÷ Net Earnings. A higher multiple signals market expectations of stronger future growth. The forward‑looking EPS incorporates expected revenue growth, margin assumptions, and share‑based compensation impacts.
Investor Playbook: Bull and Bear Cases for Infosys
Bull Case: AI demand accelerates faster than consensus, driving revenue growth to 6% YoY by FY28. Margins rebound to 23% as high‑value contracts dominate. The stock re‑ratings to a 24x forward P/E, pushing the target price to INR 1,850.
Bear Case: Execution lag in AI projects leads to prolonged margin compression and a revenue slowdown to 3% YoY. Competitive pressure from TCS and Wipro erodes market share, forcing the P/E down to 18x and the target price to INR 1,400.
Given the current valuation and the strategic inflection point, a “Hold” stance remains prudent, but investors should monitor AI order‑book conversion rates and quarterly margin trajectories closely.