Deal win momentum can be a strong force for Indian IT firms. Consider the fiscal 2020-21 results of Infosys Ltd, which has been reporting strong deal wins for some time now. The pandemic caused a sharp drop in revenue growth for sector bellwether Tata Consultancy Services Ltd (TCS) to merely 0.6% in dollar terms. However, in the case of Infosys, revenues grew by more than 6% last fiscal.
The only other time Infosys overtook TCS on this measure was during the global financial crisis. It’s almost as if major crises bring out the best in Infosys.
The moot question is if the momentum will continue and Infosys can repeat the performance in the current fiscal. After all, its deal wins were strong in FY21 as well. The Bengaluru-based firm may well beat TCS in terms of percentage growth for the third straight year, but it is likely to revert to the mean as far as incremental revenues go.
TCS has caught up fairly well in the second half of the year. Some analysts argue that it has momentum on its side, with higher sequential revenue growth in the March quarter (4.2% versus the 2% growth of Infosys), and higher deal wins at the end of the year.
Indeed, the relatively soft revenue growth and deal win numbers for Infosys for Q4 led to a 5% drop in the company’s shares on the New York Stock Exchange in opening trades. However, the company’s guidance for FY22 suggests that it expects growth momentum to continue. Despite a relatively high base, Infosys has guided for 12-14% growth in revenues in constant currency terms for FY22.
“While Infosys’s Q4 revenue and deal win numbers are slightly below our expectations, its guidance suggests fairly high growth expectations and is a positive," said an analyst at a domestic institutional brokerage. The firm’s revenues grew 9.6% year-on-year in constant currency terms in the March quarter. As such, the 12-14% growth guidance means it expects a improvement in growth. The company had announced its largest-ever deal win with Daimler in the December quarter, revenues from which will start accruing only from the second quarter of FY22.
Infosys’s strong employee addition and wage hike plans also suggest strong growth expectations.
Like its peers, the Infosys management said there is strong demand for services around digital, cloud, data and analytics. As pointed out earlier in this column, the client base of Infosys appears to have been affected less by the covid-19 pandemic than the others.
Also, the company’s guidance on profit margins suggests no major impact of its large deal wins on profitability. The company said it expects margins to be in the 22-24% range in FY22, compared to reported margins of 24.5% last fiscal. A decline in margins is expected for this fiscal, as cost savings because of the pandemic are expected to reverse to some extent. Primarily, employee costs are expected to increase, given the recovery in demand across the industry and the fight to draw and retain talent.
“We are increasing our efforts to retain talented employees. We did one salary hike cycle in January and the other one will happen in July," the company said in a virtual press conference.
As far as the Infosys stock goes, the correction following the results follows the trend seen with TCS.
There was nothing majorly wrong with the results, but the Street’s expectations were running far ahead. The Q4 results, in that sense, have brought about a healthy reality check on the valuations front.
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