Infosys Earnings: A Tactical Re-rating Play or a One-Off Pop?

The catalyst was a clear beat in a sector braced for caution. On Wednesday, Infosys posted constant currency revenue growth of 0.6% quarter-on-quarter, a notable improvement over flat expectations. The immediate market reaction was a sharp pop, with shares opening 4% higher on Friday and surging nearly 5% in early trade. The core surprise, however, was the guidance. In a quarter where many global IT firms are dialing back, Infosys raised its FY26 constant currency revenue growth guidance to 3%–3.5%, up from 2%–3%. This upgrade, coupled with strong deal wins and steady hiring, created a clear mispricing event.

The overseas signal confirmed the disconnect. While the Indian-listed stock reacted strongly, the US-listed ADRs showed an even more explosive move, jumping 7.6 percent over two US trading sessions following the earnings. This two-day surge of over 7% suggests foreign investors saw a more fundamental re-rating opportunity than their domestic counterparts, possibly due to a clearer view of demand recovery in key verticals like banking and energy.

So, is this a tactical re-rating play or a one-off pop? The setup hinges on whether the guidance upgrade is a one-time adjustment or the start of a new trajectory. The beat on revenue growth and the deal pipeline momentum provide a factual basis for optimism. Yet, the stock's reaction-particularly the outsized move in ADRs-hints at a temporary mispricing where the market is pricing in a demand recovery that may still be fragile. The coming quarters will test if the guidance upgrade is sustainable or if the stock's pop was simply a relief rally in a cautious sector.

The Setup: Price Action vs. Profitability

The market's explosive reaction focused on the headline beat and guidance upgrade, but the underlying financials tell a more nuanced story. The reported numbers show a clear disconnect between top-line momentum and bottom-line results. Consolidated net profit declined 9.7% year-on-year to ₹6,654 crore, missing expectations. This miss was largely a one-time accounting event, as the company disclosed a one-time Labour Code impact of ₹1,289 crore for the quarter. Strip out that charge, and the picture shifts dramatically.

Adjusted profitability held firm. The company's adjusted EBIT margin came in at 21.2%, a sequential improvement of 20 basis points. This resilience in the core operating model, even as revenue growth was modest, is a key positive. It shows the company is managing costs effectively and that the guidance upgrade to 3%-3.5% constant currency revenue growth for FY26 is not being achieved at the expense of margins.

The real engine for future visibility, however, is deal momentum. The company posted total contract value (TCV) of $4.8 billion in Q3, a sharp jump from the prior quarter. Crucially, 57% of that total was classified as net new, indicating genuine new business acquisition. The standout was a $1.6 billion large deal from the NHS UK, where Infosys will help leverage AI to streamline operations. This win, alongside strong activity in banking and energy, provides a tangible pipeline that supports the raised guidance.

The bottom line is that the stock's pop is being priced on future growth, not past profits. The headline net profit decline is a temporary accounting blip. The adjusted margin improvement and massive deal wins provide the financial mechanics for a re-rating. The setup is clear: the market is betting that the guidance upgrade and deal momentum will translate into sustained growth, making the current price a tactical entry point before the next earnings cycle.

The Trade: Catalysts, Risks, and Key Levels

The tactical setup now hinges on near-term events that will confirm whether the guidance upgrade is sustainable or a one-off. The first major test is the March quarter (Q4 FY26) performance. This report, due in late April, will determine if the company can deliver on its raised full-year outlook. The market has priced in a demand recovery; the next earnings will show if that recovery is translating into actual bookings and revenue execution.

The major risk to the bullish thesis is the persistence of global IT demand caution. While Infosys cited steady discretionary tech spending, the broader sector remains wary. If the March quarter shows any softening in deal wins or a slowdown in hiring, it could pressure the company to revisit its FY26 guidance. The recent jump in headcount to an 11-quarter high is a bullish signal, but it also raises the stakes for future performance.

A key near-term monitor is the stock's reaction to the broader market's reopening on January 16. The Indian market had been closed for a holiday, and the initial pop in Infosys shares opened 4% higher on Friday was against a backdrop of fragile sector-wide sentiment. The IT sector had fallen 1.1% in the prior session, and the overall market outlook remains cautious due to foreign fund outflows and trade uncertainty. The stock's ability to hold its gains against this backdrop will be a critical early signal of its resilience.

For now, the trade is clear. The catalyst is the raised guidance and deal momentum, which created a mispricing event. The risk is that global demand remains fragile, challenging the new growth trajectory. The monitor is the stock's performance against a cautious market. If Infosys can maintain its upward momentum, it suggests the re-rating is gaining traction. Any pullback could signal that the market's optimism is still too high relative to the underlying sector conditions.