Infosys narrows gap with Cognizant in India’s AI-powered IT sector

Let’s do the math: At the end of the last fiscal year, the revenue gap between the two was $459 million. While Cognizant follows the January-December calendar, local IT companies follow the April-March calendar. The gap narrowed to $304 million by the end of the April-June quarter. Infosys could reduce the gap by another $107 million with a new $1.6 billion 15-year NHS contract – unless Cognizant surprises with a big deal of its own. The timing of application will also determine the effect.

For investors, the NHS win was encouraging news amid strong operational performance. At least six brokerage firms expect Infosys to grow fastest among the big five for the second consecutive quarter, buoyed by strong project delivery, rise in large deals and minimal revenue leakage.

Infosys shares traded down 1.17 percent ₹It was at 1,472.40 on Wednesday, the day before the results.

AI push

Analysts are also optimistic about Infosys’ AI strategy.

“Similar to previous technology cycles, AI will expand the TAM (total addressable market) for Infosys,” Kotak Institutional Equities analysts Kawaljeet Saluja, Sathishkumar S and Vamshi Krishna wrote in a note dated September 11. “The best way to assess GenAI strength is to assess whether a company is leading in growth, pricing and margins; “Infosys ticks all the boxes,” he said.

Infosys is doubling down on the small artificial intelligence models (SLMs) it has focused on since last year. “We have been told to leverage the use of small language models (SLMs) as much as we can for our customers,” said an executive on condition of anonymity. The company has at least four SLMs specifically designed for IT operations, digital banking and cybersecurity.

Early last year, Infosys formed a 100-member steering committee tasked with identifying AI opportunities and reporting directly to Infosys co-founder Nandan Nilekani. Today, artificial intelligence is embedded in almost all agreements.

The NHS megadeal was probably the missing piece of the jigsaw. As second-quarter earnings approach, investors will be watching to see whether the company will announce AI revenue or make other big announcements in this space.

In the middle of all this, Mint Infosys highlights five things to watch out for as it reports earnings on Thursday.

growth trajectory

Much of the mega deal announced on Tuesday is expected to accelerate and start contributing to the company’s revenue only from next year. Still, the company is poised for growth, as management indicated last quarter that it would see an increase in most of its mega deals in the second quarter.

But uncertainties about H-1B visas and potential foreign-source taxes on U.S. companies could cast a shadow over its revenue from its largest market as customers restrict technology spending. At least three analysts expect the company’s 1-3% revenue forecast to remain unchanged for the full year.

great deals

The company is a clear beneficiary of vendor consolidation deals, where companies reduce the number of IT providers they work with. However, macroeconomic uncertainties may pose a threat to the company and management’s comments on discretionary demand will be closely monitored.

Strength in financial services, which accounts for more than a quarter of revenues, will help navigate this uncertain demand environment. Analysts will also monitor program cancellations, tariffs and price pressure on major deals.

AI update

Investors and analysts will be keeping a close eye on the AI ​​portion of the company’s report card, even as its top five companies have made major announcements in this regard.

While TCS announced that it will invest $6 billion in AI data centers, HCL is investing in AI-led IP solutions. Tech Mahindra, on the other hand, is building large language models for dominant use.

In this context, investors will closely follow the company’s updates on small language models, the revenue growth from AI-led solutions, and most importantly, whether the company generates revenue from AI.

Operating margins

Infosys maintained its 20-21% margin despite huge deals and fee hikes. The company uses its margin improvement plan, Project Maximus, to keep its margins under control.

The company has reduced its general and administrative expenses, reduced subcontracting, and is retaining some of the efficiency gains achieved through Gen AI. A continued focus on value-based sales is expected to boost margins further barring any wage increases last quarter. INR depreciation is also expected to help the company maintain its margins.

GCC expansion

Infosys is one of the few major IT outsourcing providers to opt for Global Talent Centers (GCCs). While the company has been engaging with the Gulf Cooperation Council (GCC) for several years, it now has a more structured approach with dedicated leadership. Earlier this year, Deval Shah was appointed head of the GCC practice.

Infosys is not only sourcing from existing GCCs but also aims to set up and run new ones. The company supports IRBs through recruitment services, infrastructure and build-operate-transfer models. Management comments on Gulf Cooperation Council (GCC) commitments and related revenue streams will be closely monitored.