The Indian Blue chip firm Infosys LTD ADR (NYSE:INFY) has discarded its sluggishness by announcing remarkable growth in its Q3 FY13 earnings and by beating analysts’ expectations. The company reported net income of $434 million against $431 million in the last quarter. Revenue, including Lodestone, rose by 5.8% from a year ago to $1,911 million, and excluding Lodestone revenues posted a 3.7% year-over-year growth at $1,872 million. In spite of the increased operating expenses, Infosys was able to maintain margins through efficiency improvements by focusing on making the right investments for profitable and sustainable growth in the long term. But the significant drivers of robust growth, which attracted my affinity towards this stock, are:
1) 8 big outsourcing deals
With the shift in market share and rising competition from the lower margin vendors, Infosys has changed its strategy in the past few quarters. The company traded off margins to regain market share by chasing large deal flows. Infosys closed 8 large deals (4 in the US, 3 in Europe, and 1 in India) in the quarter (TCV on US $731 million), which further enhances its strong presence in various geographies of the world. North America reported tepid growth of only 1.6% in constant currency, India grew by 44.7% sequentially, and rest of the world grew by 7.4% in constant currency. Europe grew by 14.4% in constant currency because of the Lodestone integration, which strengthens its EMEA and SAP vertical presence. I believe Infosys will gain from learning the IDEA approach of Lodestone in achieving business transformation across the project life cycle.
The major catalyst for winning the 8 deals was its consulting and systems integration business, which grew by 8.1% organically quarter-over-quarter and by 15% when including Lodestone. The Lodestone deal helped ithe company inrease its revenue to 32.6% of the total revenue in 3Q, in comparison to 30.0% in the second quarter. The total contract value of the products and platforms business has touched $600 million, of which over $100 million came in the third quarter. In addition, the company’s Product and Platform Space also had 14 wins across industries and geographies, which are widely adopted by 70 global clients. Pricing has also gone up by 1.8% this quarter due to the faster increase in this business.
The company has signed ~20 transformational deals over the last three quarters and will witness more in the upcoming quarters.
2) Ignition of recovery phase
In my view, the first step towards recovery was made when the company signed deals to improve its US presence – with Harley Davidson and Marsh BPO, which reflects greater willingness by the company for deals that include asset and people transfer as heavier onsite component of revenue. In addition, the closer account management model will also help the company to recoup revenue shares from top 50 accounts. As this model has already worked well for Cognizant Technology Solutions Corp (NASDAQ:CTSH) and Accenture, I believe that if Infosys is able to replicate the same, it would definitely put the company back on track.
3) Strong Client addition
Another point of attraction- Infosys added 89 clients during the last quarter, and the number of active clients grew to 776 up from 715 in Q2 FY13. This point seems pretty impressive in maintaining the growth momentum of the company.