Q2 preview: Infosys narrows gap with Cognizant in India’s AI-powered IT sector
Infosys clinches $1.6 billion NHS deal, closing revenue gap with Cognizant. Investors eye growth, AI strategy, and margins ahead of Q2 earnings.
When Infosys Ltd bagged its first mega deal in two years, it wasn’t just a blockbuster announcement coming 48 hours before its Q2 results. It was a clear signal that India’s second-largest IT services company was closing in on Nasdaq-listed Cognizant Technology Solutions Corp, a larger peer.
Let’s do the math: at the end of the last fiscal, the revenue difference between the two was $459 million. Cognizant follows the January–December calendar, whereas homegrown IT companies follow April–March. By the end of the April–June quarter, the gap narrowed to $304 million. With the new $1.6 billion, 15-year NHS contract, Infosys could reduce the difference by another $107 million—unless Cognizant surprises with its own big deal. Timing of execution will also determine the impact.
For investors, the NHS win came as heartening news amid a strong operational performance. At least six brokerages expect Infosys to grow the fastest of the big five for the second consecutive quarter, backed by robust project delivery, ramp-up of large deals, and minimal revenue leakages.
Infosys shares traded 1.17% lower at ₹1,472.40 on Wednesday, a day ahead of the results.
AI push
Analysts are also bullish on Infosys’ AI strategy.
“Similar to earlier tech cycles, AI will expand the TAM (total addressable market) for Infosys. The best way to assess GenAI strength is to evaluate whether a company is leading on growth, pricing and margins—Infosys ticks all the boxes," said Kotak Institutional Equities analysts Kawaljeet Saluja, Sathishkumar S, and Vamshi Krishna, in a note dated 11 September.
Infosys is doubling down on small AI models (SLMs), a focus since last year. “We are being told to leverage the use of small language models (SLMs) for clients as much as we can," said an executive on condition of anonymity. The company has at least four SLMs tailored for IT operations, digital banking, and cybersecurity.
Early last year, Infosys formed a 100-member steering committee tasked with identifying AI opportunities, reporting directly to Infosys co-founder Nandan Nilekani. Today, AI is embedded in almost all deals.
The NHS mega deal was arguably the missing piece to the puzzle. With Q2 earnings around the corner, investors will watch if the company discloses AI revenue or makes any other big announcements in the space.
Amid all this, Mint highlights five things to watch out for as Infosys declares its earnings on Thursday.
Growth trajectory
Much of the mega deal announced on Tuesday is expected to ramp-up and start contributing to the company’s revenue only from next year. Still, the company is poised for growth as its management had pointed out last quarter that it would see a ramp up of many of its mega deals in the second quarter.
However, uncertainties on the H-1B visas and possible outsourcing taxes on US companies could cast shadows on its revenue from its largest market as clients might hold back their tech spending. Atleast three analysts expect the company’s revenue guidance of 1-3% to be unchanged for the full year.
Large deals
The company has been a net beneficiary of vendor consolidation deals where companies reduce the number of IT vendors they work with. However, macroeconomic uncertainties might pose a threat to the company and the management’s commentary on discretionary demand will be closely tracked.
Strength in financial services, accounting for over a fourth of revenue, should help navigate this uncertain demand environment. Analysts will also track program cancellations, tariffs, and pricing pressure in large deals.
AI update
Investors and analysts will keep a keen eye on the AI section of the company’s report card even as its top five peers have made big bang announcements on the same.
While TCS announced a $6 billion investment in AI data centres, HCL is placing its bet on AI-led IP solutions. On the other hand, Tech Mahindra is building large language models for sovereign use.
In this backdrop, investors will keep a close watch on the company’s update on small language models, any incremental revenue from AI-led solutioning, and most of all, whether the company calls out revenue from AI.
Operating margins
Infosys has maintained 20–21% margins despite large deal ramp-ups and wage hikes. The company is leveraging Project Maximus, its margin improvement plan, to keep margins in check.
The company has lowered its general and administrative expenses, reduced subcontracting, and is retaining some of the efficiency gains through Gen AI. Its continued focus on value-based selling is further expected to boost margins in the absence of any wage hikes last quarter. INR depreciation is also expected to help the company retain its margins.
GCC expansion
Infosys is among the few large IT outsourcers doubling down on Global Capability Centers (GCCs). While the company has engaged with GCCs for several years, it now has a more structured approach with dedicated leadership. Earlier this year, Deval Shah was roped in to head the GCC practice.
Infosys is looking not only to source work from existing GCCs but also to set up and run new ones. The company supports GCCs through recruitment services, infrastructure, and build-operate-transfer models. Management commentary on GCC engagements and associated revenue streams will be closely watched.
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