The sharp pickup in Infosys Ltd’s revenue growth shows clearly that it has momentum on its side. Another performance metric that has got tongues wagging is the amount of large deals it has won.
The company said last month that the total contract value of the large deals it signed last year stood at $2.79 billion, or 45% higher compared with fiscal year 2014-15.
But does this mean the company’s revenue growth rate will pick up as a result?
Note that HCL Technologies Ltd’s results in the past few quarters have demonstrated adequately that large order wins do not necessarily result in faster revenue growth. According to the company, new order wins don’t translate into commensurate incremental revenues because they also contribute towards making up for earlier projects that were completed.
This is a moot point. JPMorgan India Pvt. Ltd said in a note to clients: “A significant portion of project-based deals come up for renewal every year; (besides), ~20-25% of annuity-deals come up for renewal/backfilling.”
Unless technology companies such as Infosys have a high success rate with rebids, the existing base of revenues will get eroded. As such, the new large order wins will first help in plugging the gaps that arose because of completed projects, before contributing to growth.
At HCL Technologies, large order wins have amounted to over $1 billion each quarter for over 12 quarters, but revenue growth has been declining. Revenue grew by 8.1% in constant currency terms in the March quarter, about half the rate at which it grew in the April-June 2015 quarter.
The JPMorgan note says, “The renewal pipe is critical to fill. Winning a very high percentage of renewal deals and more crucially, winning additional business from existing clients requires sound mining/farming skills, which we believe is far more important than hunting for big contracts.”
Of course, all of this is not to say that Infosys lacks in client mining skills. In fact, it’s quite likely that the increase in order wins is the result of better mining.
Even so, it’s clearly premature to conclude that the sharp increase in the company’s deal wins will be sufficient to plug the gaps that arise from completed projects, as well as contribute handsomely to future growth.
The writer does not own shares in the above-mentioned companies.