Business Today

Deal wins a tricky growth indicator for IT companies

Even though most of large IT companies reported an acceleration in TCV wins, the report takes the example of Infosys, TCS and Tech Mahindra where the TCV win data translates differently in revenue growth

Rukmini Rao        Last Updated: September 13, 2019  | 22:02 IST
Deal wins a tricky growth indicator for IT companies

The total contract value (TCV) of the deals that IT services companies declare in their quarterly results not only indicates the acceleration of the revenue growth but also the nature of the deal that brings in better predictability of the  future revenue  growth. In circumstances where deal wins reduce, it shows a deceleration in the company's growth.

However, the latest report by Kotak Institutional Equities points out that due to lack of a standard definition and various companies taking into account different considerations, TCV should not be seen as a reliable indicator to measure the revenue growth of IT services companies. "TCS includes all bookings won through the course of the quarter (including renewals and value of Time & Material  contracts). Infosys includes renewals and new business won but only for deals exceeding $50 million in size. Tech Mahindra excludes renewals and deals lesser than $5 million in size from TCV number. The point is that TCV of deal wins is of little relevance for cross-company comparisons," says the report.

Even though most of large IT companies reported an acceleration in TCV wins, the report takes the example of Infosys, TCS and Tech Mahindra where the TCV win data translates differently in revenue growth. Infosys' deal wins capture the acceleration in revenue growth, but it does not capture many key elements of wins such as deals with less than $50 million in size, deals which are won but value is not explicitly defined on the dotted line, among others. "Nonetheless, the sharp 123 per cent yoy growth in TCV on a trailing twelve-month basis is so strong that it is bound to accelerate revenue growth. Infosys' revenue growth has accelerated to 12.4% yoy in the Jun-19 quarter from 6% yoy in the Jun-18 quarter," says the report.

TCS with its limited history does not have sufficient data for a meaningful analysis. It started disclosing quarterly bookings data only from the June 2018 quarter. "In any case, TCV of $5.7 billion in the most recent quarter is up 16 per cent from the same time last year. This high growth in bookings may not be sufficient to prevent a deceleration in growth since the company has a high base of the previous year where the company benefited from closure and a ramp up in mega deals," the report added. However, as an aberration, Tech Mahindra showed a deceleration in growth despite strong TCV numbers. "Tech Mahindra's revenue growth has slowed to 3.7 per cent y-o-y in Jun-19 quarter despite a 57 per cent y-o-y growth in TCV on a ttm basis. The leakage of existing revenues in Pininfarina and a ramp down in auto sub-vertical impacted overall numbers for the quarter. Tech Mahindra's revenue growth slowdown highlights an important element while evaluating TCV numbers-defence of the revenue base," said the report.

While the instances of three companies indicate different outcomes in spite of increased deal wins, historically, the pace of deal wins and direction of revenue growth has been low. Another example is that of HCL Technologies, which consistently called out deal wins in quarters where net new order wins were over $1 billion from December 2012 to June 2014. However, the continued deceleration in revenue growth in FY13 and FY14 had surprised many analysts.

Eventually, the company discontinued the disclosure of new wins, introducing annual revenues and margin guidance in FY17. Even for Infosys, the growth rates slowed down when growth in TCV of deal wins accelerated in FY17, says the report.

Although the metric has been better correlated with revenue growth for the past few quarters, the report warns that lack of standard definition and investors just relying on TCV metric for growth will not be sufficient in a volatile environment.

Also Read: Odd-even rule to be implemented in Delhi after Diwali from November 4 to 15

Also Read: Zomato suspends its Infinity Dining programme amid protests by restaurants

Also Read: Ola, Uber surge pricing to get a threshold, but it's still going to be expensive

Youtube
  • Print

  • COMMENT
BT-Story-Page-B.gif
A    A   A
close