Infosys’ result was among the most awaited for the quarter ending September 2020, and not without reason. India’s second largest IT firm has been performing consistently over the last year and has outperformed larger rival TCS, at least in the last three quarters.
After what analysts describe as the golden period in Infosys history, when it was considered a bellwether, the company is seeing similar growth momentum now.
That was way back in 2010, around the time of the global financial crisis. “Between 2010 and 2014, there was a lot of leadership churn,” said Pareekh Jain, founder, Pareekh Consulting. During that period, TCS gained the IT bellwether statut that it continues to hold even now, he added.
On the back of the covid pandemic, Infosys has become an outlier reporting strong deal wins and consistently better growth. Infosys is becoming a bellwether again and the strategy and investments it has made over the last two years will help, chairman Nandan Nilekani told Business Standard in a recent interview.
So, will it be a bellwether? The coming quarters would be telling, for sustenance of this growth would be important. However, analysts have pointed out that the company is well on track and poised for growth in the coming months.
Analysts expect the valuation between TCS and Infosys to narrow as well.
Let's look at the Q2 results: The firm reported stellar Q2 results that beat expectations in revenue and margins. Revenue grew $3,312 million for the quarter ended September 2020, up 6 percent quarter-on-quarter and 3.2 percent year-on-year. Infosys also saw its highest ever deal wins at $3.15 billion during the period, including the Vanguard deal. Of this, the net new total contract value share is about 86 percent.
In addition, the company’s growth over the last three quarters (between March and September) has been quite impressive.
On a y-o-y basis, it grew 4.4 percent, -0.3 percent and 3.2 percent respectively. On the other hand, its rival TCS has grown, 0.87 percent, -7.7 percent and -1.7 percent respectively y-o-y for the same time period.
Sudheer Guntapalli and Hardik Sangani, research analysts, ICICI Securities, said in a note that the company’s growth has consistently outperformed that of TCS over the previous six quarters and expect this to continue.
Where does the confidence come from?
The growth momentum largely comes on three accounts
- Strong deal momentum
- Investments the company made in digital paying off
- Sector recovery in BFS, retail, life sciences
Strong deal momentum
At the company's earnings call on Wednesday, CEO Salil Parekh said the majority of the deal wins are digital as clients invest in transformational activities, resulting in good demand and pipeline. While admitting that the large deals might not be sustainable, Parekh said they have bottomed out and growth is coming back.The company signed 16 large deals in the quarter, with 11 from the Americas and four from Europe. The company has also been able to gain market share due to vendor consolidation.
Jain from Pareekh Consulting said the company is also aggressive in securing large deals that are driving the momentum.
In addition, the company’s digital revenue now stands at 47 percent compared with 45 percent in the previous quarter. This figure is expected to soon cross the 50 percent mark, Parekh said.
Over the last few years the company has been investing in digital capabilities to cater to growing demand. For instance, it recently launched Cobalt, a suite of cloud-related services to help its clients in the transformation journey.
A report by HDFC Securities said that improving capabilities in Salesforce, and ServiceNow will aid in driving growth. The company acquired Simplus and GuideVision, a Salesforce and ServiceNow partners in February and September 2020 respectively. There is a huge demand for these platforms and through this acquisition the company aims to tap into this growing market.
A Motilal Oswal report said it expects Infosys to be the key beneficiary of client IT spends.
Banking and financial services, which accounts for about 30 percent of the company’s revenue is showing improvement. The sector grew 3.7 percent in Q2, year-on-year.
UB Pravin Rao, COO, Infosys, said in the earnings call that investments are happening in the mortgage, lending and banking space. Retail grew 0.7 percent for the quarter and is recovering as well with large retail firms investing in e-commerce. However, the pace of recovery is slow. Hi-tech and life sciences are one of the fastest growing segments at 24.2 percent and 9.3 percent respectively y-o-y.