Infosys’ Growth Catalyst

IN JANUARY THIS YEAR, Salil Parekh completed five years at Infosys and the company gave him another term of five years to lead the company. No surprises here, given that in the history of the company, Salil has added the highest incremental revenue and ensured that it stands up to arch rival Tata Consultancy Services (TCS). At the company’s annual general meeting in June this year, Chairman Nandan Nilekani endorsed Salil for steering the company towards growth. “He has successfully institutionalised the One Infosys approach to position our company to work with clients for their long-ranging digital transformation, cost efficiency and resilience programmes that are of vital importance for them to thrive in the near term,” Nilekani said in his speech.

A few years ago, TCS was almost twice the size of Infosys. The gap is narrowing. For instance, in FY20, Infosys’ revenue was $12.7 billion compared to TCS’ $22 billion. In past three fiscals under Salil Parekh, Infosys has been growing much faster than TCS, adding an incremental revenue of nearly $5.5 billion ($18.2 billion in FY23). TCS added $5.9 billion. Its full-year revenue was $27.9 billion in FY23.

While IT services firms were embarking on digital journey, focusing on new-age digital transformation deals earlier too, Covid accelerated the trend globally, benefiting Infosys. Infosys is today inching towards pipping Cognizant ($19.4 billion in CY22) to become the second-largest IT services company in the country.

Industry analysts point at two transformations under Parekh. One is execution and the other is consistency with which the company has been winning large deals (with a focused large deals team) even though some of them may have lower margins. Numbers speak for themselves. In FY23, the company’s operating margin was 21%. Large deal TCV (total contract value) for the year was $9.8 billion. It added 11 new clients in the $50 million-plus revenue (large deals) bucket .

Infosys ended FY23 with 15.4% YoY revenue growth (in constant currency) versus guidance of 16-16.5%. The company’s operating margin stood at 21%. Some recent billion dollar-plus deals include those with global energy giant BP, Denmark’s Danske Bank, nearly $2 billion AI automation deal with an undisclosed client, European telco giant Liberty Global, among others.

At the core of its revenue growth is the digital business, which grew over 25% (in constant currency terms) in FY23 and now accounts for 62% of revenue. In 2020, the company introduced Cobalt, a service solution suite to help companies take their businesses to the Cloud. One of the clients where Infosys has deployed Cobalt is a large telecom operator which is using it for better data-driven decision-making.

Also, given the buzz around ChatGPT3 and AI, the company has made its AI integrated/enabled solutions a logical extension of its digital offerings to stay ahead in the market. In May this year, Infosys launched Topaz, an AI-focussed service, solution and platform suite that uses generative AI. With over 12,000 use cases, the suite provides faster cognitive enterprise solutions. Infosys is also collaborating with Open.ai, several tech majors and a number of start-ups. This allows it early sneak peek into developing technologies. It has trained 40,000-plus employees in Gen AI tech. “As a consequence of our mega deal wins, traction in cost efficiency, automation, differentiated digital Cloud and generative AI capabilities, we are well positioned for the medium term, especially towards the end of our financial year and the period after that,” Parekh said at the company’s Q1 FY24 investor call.

Goldman Sachs says in its latest commentary on the Indian IT services sector that Infosys’ growth will likely bottom out in FY24 and accelerate sharply thereafter. “We expect recent mega deal wins to start reflecting in revenues from early CY24; we note that Infosys’ deal pipeline remains strong, with large deal wins growing at 35%-plus YoY in Q1 of FY24,” it says, adding, “We see Infosys as a beneficiary of a recovery in discretionary spending and vendor consolidation given its strong execution record and capabilities. We forecast that revenue growth will accelerate to 11% (in constant currency terms) in FY25, faster than the IT sector average of 10%.”

Also, following the exits of two of the company’s presidents, Ravi Kumar and Mohit Joshi, the company said it has put in place a new delivery structure and changes in its financial services team. Infosys is also working towards improving its profitability with a comprehensive margin expansion programme. “The programme will work in five areas: pyramid efficiency, automation and generative AI, improvements in critical portfolios, reducing indirect costs and communicating and deriving value across the portfolio,” Salil Parekh said in July this year. With steps being taken keeping in mind the short, medium and long term strategy, we have an ambition to improve our operating margins, he added.

The company had originally guided for 4-7% growth in FY24 but lowered it to 1-3.5% four months later. In a July 20 report on the company, Nomura analysts Abhishek Bhandari and Krish Beriwal said: “Surprise lowering of revenue growth guidance for FY24 is premised on weaker discretionary demand (transformation projects) leading to lower-than-expected volumes and slow client decision-making as per management. Growth is likely to be back-ended in FY24 driven by ramp-up of some large deals and winning of a few in the pipeline.”