Big Four to reveal new strategies this earnings season

Written by P P Thimmaya | Updated: Oct 8 2012, 08:11am hrs
The three-month period stretching from July to September has traditionally been the strongest quarter for the Indian IT services industry when companies by and large report strong performances on all counts. It is a different situation this time around though. The September quarter is expected to have very divergent voices from the top four of the Indian IT services industryTCS, Infosys, Wipro and HCL Technologiesgoing by their responses to the ongoing economic crisis in key markets.

During the June quarter, TCS and HCL Technologies reported numbers which outperformed the market but the same was not the case with Infosys and Wipro. In fact, Infosys discontinued its long held practice of giving out quarterly revenue guidance citing market volatility. Sudin Apte, CEO, Offshore Insight, an IT advisory firm said, I dont have a very pessimist view. Though the market is tough with delay in decision making, we are not expecting anybody grow substantially this quarter. However, the early signs is that the mood is getting a little better at least in the US but it is yet to been seen how much will translate in dollar signings.

The $100 billion Indian IT industry, of which $70 billion constitutes exports has been struggling for growth over the last two-three years. The sector has been experimenting with new strategies and business models to find a way out of the current crisis, but no clear cut path has been found yet.

Though for now the US economy is showing some sense of normalcy there are still certain overhang which could cloud the prospects of the Indian IT industry. The recent measure by US Federal Reserve on quantitative easing (QE) of infusing further liquidity into the economy could increase the confidence levels of US corporates and having an indirect impact for IT companies but these are very early signs.

On the prospects of second quarter results, Dipen Shah, headprivate client group research, Kotak Securities, We expect companies under our coverage to report a sequential revenue growth of about 4% driven by volumes and depreciation in rupee. Volumes for the top 4 companies are expected to rise by 2-4%. This will be relatively muted for a quarter which is considered to be best for the Indian IT companies.

There are multiple factors which are contributing towards the muted growth of the sector: the Indian IT industry which is dependent on the discretionary spends has not seen any kind of uptick on this front, corporates in US and Europe are very cautious about their spending decisions thereby extending the entire cycle of giving out IT outsourcing contracts. Lastly, there have been also certain company specific issues which has also been a drag on the growth.

The star performer during the first quarter, TCS has already given enough indications that in the second quarter, it is unlikely to have a repeat performance but it is expected to remain ahead of the pack. Morgan Stanley in its preview on the technology said, We believe TCS is likely to deliver close to 5% quarter-on-quarter volume growth in Q2. Despite lower volume growth, we think revenue growth could inch up to 4-5% QoQ.

Majority of the brokerage houses are of the view that the operating margins of TCS may slight dip in operating margins during the second quarter as there would be a marginal shift to onsite for new deals starts and certain impact of the lower margin deals won in the prior quarters. However, the $10 billion plus IT company is quiet comfortable about the current demand environment and has not witnessed any kind of cancellation in orders.

The company which has been under very intense scanner has been Infosys which has witnessed very turbulent period for the last couple of quarters and much is expected out of them with the recent acquisition of Lodestone Management Consultants.

CLSA in its view on Infosys said that the company sounded less than sanguine on near term demand environment asserting that there has been little change in the business momentum in the last few months. Though, at the same time, Infosys has been sending out the right signals to the market in terms being more aggressive in wining new accounts as well as being active on the inorganic front.

The company has in the recent past been more flexible in taking on new contracts both in terms of the conditions as well as pricing. It is also slowly moving towards a more decentralised structure which could mean more autonomy in decision making for its employee unlike its previous system of a very top down approach.

There will still be lot of eyes on Wipro especially under the leadership of TK Kurien to see the kind of changes the company has been able to bring in the last 18 months. Though, it would be very early to say whether the company has completed its restructuring process and come on the path of the sustained growth.

The second quarter results could define many other things for things for the industry especially the growth guidance of 11-14% for FY 13 by Nasscom. Though, certain quarters are sceptical about this growth would be achieved with some of the multi-billion dollar Indian companies likely to report revenue below 10%. Nasscom has already said that they would a relook at their guidance in the month of October and all indications are that it may to lower it further.

The only saviour for the Indian IT services industry has been the depreciating rupee easing certain pressure on their cost structure but the recent appreciation of the rupee against the dollar is unlikely to be a very worrisome factor.

As Shah noted about the future prospects for Indian IT industry, While the economies of USA and EU may take long to stabilise and improve, the stimulus measures taken by the developed economies have eased concerns of catastrophic defaults/bankruptcies. This may prevent demand from falling in foreseeable future.