Will Q3 deal wins boost the Infosys share price?

Demand for enterprise software and tools has been clouded by macro risks, but Bengaluru-based Infosys’s Q3 numbers showed resilience in the face of headwinds. The company continues to win more deals and expects momentum to continue in the first three months of 2023.

- Infosys beat both top and bottom line estimates; earnings boosted by contract wins

- India forecast to leapfrog China to become the world’s second-largest SaaS market by 2026

- Infosys is the second-largest holding in the iShares India ETF

Indian software-as-a-service (SaaS) company Infosys [INFY] beat estimates when it delivered its third quarter 2023 earnings on Thursday 12 January.

Profit for the three months to the end of December was 65.9bn Indian rupees (₹), up 13.7% year-over-year. Analysts had expected net income to come in at 65bn rupees, according to Refinitiv data.

Revenue jumped 19.9% year-over-year from ₹318.7bn to ₹383.2bn, beating the analyst consensus by 1.1%. Revenue was up 13.7% year-over-year on a constant currency basis, and 2.4% up from the previous quarter.

"Our revenue growth was strong in the quarter, with both digital business and core services growing. This is a clear reflection of our deep client relevance, industry-leading digital, cloud, and automation capabilities," said Infosys Salil Parekh in a statement released with the results.

The Infosys share price rose 1.5% on the day of the announcement. In the past year it has fallen 26.5% but is up 2.2% since the start of 2023.

Deal wins highest in eight quarters

Heading into earnings, there had been concern that inflationary pressures on companies’ information technology (IT) spend could dent numbers.

While Infosys’ Q3 operating margin did slip to 21.5% from 23.5% in the year before, Infosys managed to alleviate any concerns about softer demand with its largest contract value in eight quarters. Total contracts were worth $3.3bn at the end of December.

"As reflected in the large deals momentum, we continue to gain market share as a trusted transformation and operational partner," Parekh said in his statement.

Momentum is expected to continue through the next quarter. Infosys raised its full-year revenue guidance for the 12 months to the end of March from a range of between 15% and 16% to between 16% and 16.5%. It reiterated full-year operating margin guidance of 21% to 22%.

In addition to announcing its earnings on 12 December, Infosys appointed Govind Iyer as the new independent director of the company, to serve on its board for the next five years. Iyer previously worked at Procter & Gamble [PG], Coca-Cola [KO], and Heinz [KHC] and served on the Wharton Executive Education Advisory Board.

India’s SaaS market to leapfrog China’s

In the near-term, there will remain challenges for the company, including the increasing risk of recession and the potential of less enterprise spending.

“Infosys could achieve fiscal 2023 sales growth in the low double digits in constant currency, fuelled by steady cloud demand. Though this figure is lower than 2022’s 19.7%, the slowdown isn’t due to competition but is a function of tougher comparisons and rising recession risk,” wrote Bloomberg Intelligence analyst, Anurag Rana, in research.

However, in the long term, Infosys and other SaaS stocks stand to benefit from increased adoption of cloud software and artificial intelligence applications to digitise and optimise workflows.

The SaaS market in India is expected to bring in a combined $100bn in annual revenue by 2026, according to consultancy firm Zinnov. An April 2022 report entitled India SaaS – Punching Through the Global Pecking Order has forecasted that the country will surpass China to become the second-largest SaaS market in the world over the next few years.

“Not only have Indian SaaS companies come of age, but they have also been at the forefront of creating new … products, led by visionary founders,” wrote Zinnov CEO Pari Natarajan in the report.

Funds in focus: iShares MSCI India ETF

The risk of recession isn’t yet being priced into developed market equities, BlackRock strategists wrote in their weekly commentary on 9 January. With this in mind, emerging market-focused ETFs with exposure to Infosys could be a better buy.

Infosys is the second-biggest holding in the iShares MSCI India ETF [INDA], with a weighting of 6.67% as of 12 January. The fund is down 11.7% in the past year, but has gained 2.2% since the start of 2023.

The stock is also the second-largest holding in the VanEck Digital India ETF [DGIN], which allocates it a weighting of 7.87% as of 12 December. The fund is down 21.7% since launching on 17 February, but up 1.9% since the start of 2023.

The iShares MSCI India Climate Transition ETF [I98.SI] also holds the stock, in acknolwedegment of the company becoming a certified carbon neutral business in 2020. Infosys is the fund’s second-largest holding at a weighting of 7.10%. The fund fell 11.8% in the past year and has been trading flat since the start of 2023.