Infosys ADRs fall 2% as Q3 earnings decline and margin pressure offset guidance upgrade

Infosys’ ADRs fell nearly 2% on Wednesday after the company reported its December quarter results, as investors weighed a modest profit decline and margin pressure against stronger revenue performance and an upward revision to full-year growth expectations.India’s second-largest IT services company reported a consolidated net profit of Rs 6,654 crore for the third quarter, down 2% from Rs 6,806 crore in the year-ago period. However, operating revenues rose a healthy 9% year-on-year to Rs 45,479 crore, driven by steady deal execution and demand resilience in key markets despite a seasonally weak quarter.

At constant exchange rates, sales grew 1.7% year-on-year and 0.6% sequentially. The company also raised its FY26 revenue growth expectations to 3-3.5% at constant exchange rates, up from its previous expectations, while maintaining its operating margin expectations at 20-22%. The upgrade in expectations was an important positive conclusion from the results, even though profitability came under pressure in the short term.Operating profit for the quarter fell 6% year-on-year to Rs 8,355 crore before declining 10.7%. As a result, operating margin fell sharply to 18.4%, compared to 21.3% in the December quarter last year and 21% in the September quarter.

The margin contraction was largely driven by the impact of new labor laws, higher sales-related costs and continued investments in newer growth areas.

Infosys disclosed an exceptional item of Rs 1,289 crore related to implementation of labor laws during the quarter, which weighed on reported profitability. Excluding this one-off impact, margins would have been higher but still reflected cost pressures from furloughs and deal ramp-ups.

Equirus Securities said overall performance was better than expected on constant currency sales in US dollars, with reported growth of 0.6% quarter-on-quarter. On an adjusted basis, excluding labor law-related costs, margins were broadly in line, although slightly down after adjusting for other one-off factors. The brokerage highlighted the strong TCV for large deals as a key positive and said the upward revision to FY26 growth prospects was higher than expected.

At the current market price of around Rs 1,600, Infosys is trading at price-to-earnings ratios for FY26, FY27 and FY28 of 22.8x, 21.1x and 19.5x, respectively, based on earnings estimates ahead of the third quarter results.

While valuation comfort and strong deal wins provide support, near-term margin pressure and seasonal weakness in the March quarter could continue to impact investor sentiment, which was reflected in the initial reaction seen in Infosys’ ADRs.

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