Indian IT industry gets a festive feel

Written by Debojyoti Ghosh | Debojyoti Ghosh | Anand J | Updated: Oct 28 2013, 16:26pm hrs
Indian IT industryFor the Indian IT biggies, North America has seen more than 3% growth for all top-four players ? TCS, HCL, Infosys and Wipro.
With the countrys blue-chip software services companies posting strong September-quarter earnings indicating renewed confidence among clients in its largest markets and a healthy surge in outsourcing demand, the Indian IT sector has already set the festive mood ahead of the Diwali celebrations.

While the leader Tata Consultancy Services (TCS) and fourth-largest player HCL Technologies have maintained a steady revenue growth despite a slowing global economy, both the Bangalore-based IT majors Infosys and Wipro have now joined the club shaking off a spell of sluggish top-line growth seen over the last two years.

Backed by buoyancy in America and Europe and aided by rupee depreciation, top-tier IT firms have recorded a sequential dollar revenue growth of over 3% during the July-September stretch. TCS led the pack with a 5.4% growth followed by Infosys at 3.8% and HCL Technologies recording a 3.5% quarter-on-quarter growth. However, Wipro was still behind its peers with 2.7% dollar-revenue growth, though it did make some strides towards regaining some of its old glory.

The management commentary during the quarter was uniform across the software-services majors projecting an early sign of an upturn in IT spend globally, unlike in the past where establishing a common trend across the sector was difficult. However, the companies indicated that going by the current business environment, visibility into client spends, remains limited to a single quarter.

For the Indian IT biggies, North America, which contributes over 60% of the revenues, has seen more than 3% growth for all top-four players on a sequential basis with HCL Tech leading the pack with a robust growth rate of 4%. In Europe, TCS recorded a spectacular show of almost 20% sequential growth followed by Infosys at 5.2% and HCL Tech at 2.6% quarter-on-quarter. The European continent fuelled some large deals for the software-services firms during the quarter despite the regions macro-economic concerns.

In terms of operating margin, TCS widened the gap with its nearest rival Infosys by another 3% during the September quarter, while the NR Narayana Murthy-led firm remained steady during the period. Mumbai-headquartered TCS reported an operating margin of 30.2%, which was a 3% increase from the previous quarter, while for Infosys it stood flat at 23.5%, even without including the provision of R219 crore for visa related matters. A year ago, the operating margin between the two companies were almost similar.

For Wipro, operating margin during the quarter grew 2.5% sequentially to 22.5%, the highest in the last three years. The Azim Premji-led company recorded a 2.7% dollar revenue growth for the July-September period, the highest sequential rise in the last seven quarters,

Infosys, which posted September-quarter revenue growth beating Street expectations, saw its share jump to its highest close in nearly two-and-a-half years on the day it announced results. The earnings announcement, the second since NR Narayana Murthys return as executive chairman, sent the companys shares soaring.

Delhi-headquartered HCL Techs revenue growth was backed by strong momentum in Europe and Americas and its bread and butter vertical infrastructure services, which grew at 8.8%. In Europe, the company crossed a milestone run rate of $1.5 billion reflecting a 23.6% growth year-on-year.

TCS

Indias largest IT services firm continued to surprise the Street by topping estimates. Valuation crossed R4 lakh crore during this quarter, with the $10 billion IT firm witnessing its volumes grow by 7.3% sequentially. Operating margin (OPM) rose by 3% in a single quarter to touch 30.2%. This is at a time when the second

Infosys just managed to maintain the OPM at 23.5%.

The strongest volume growth in nine quarters and a weak rupee saw the company posting a net profit of R4,702 crore for the September quarter, a sequential jump of 24%. The software services exporters revenues also saw a strong growth 16.6% quarter-on-quarter to R20,977 crore.

We have demonstrated all-round strong growth across markets and industries, highlighted by efficient and rigorous execution. The ongoing investments in industry-led solutions and our efforts to provide insights and articulate the relevance of the digital revolution to business is helping us gain mindshare with customers and differentiate the TCS brand in the market. We continue to see a robust demand pipeline across markets and a unique opportunity to strategically partner and participate with clients, said N Chandrasekaran, CEO and managing director of TCS.

TCS performance during the quarter was backed by healthy demand seen across all its industry verticals. The companys anchor industry segment BFSI maintained its growth momentum with revenues growing by 5.7% sequentially and it expects the segment to grow along the companys average for the fiscal. Life sciences & healthcare, media & entertainment and energy & utilities also witnessed robust growth at 9.3%, 10.5% and 8.3% respectively. The telecom vertical grew by 2.1% while verticals such as manufacturing, transportation, and retail & distribution posted 5.4%, 5.4% and 4.7% revenue growth sequentially.

Geographically the company saw spectacular growth in Asia Pacific & Continental Europe that grew by 8.5% and 19.3% quarter on quarter, respectively. The North America saw a revenue growth of 3.7%, UK grew by 6.7% and Asia pacific by 8.5%. The company added three clients in the $100 million plus revenue region.

The managements bullish commentary, coupled with continued hiring and pick up in discretionary spends point that TCS will continue to be an out performer in the sector, Angel Broking said in a note. The company also expects the current fiscal to be better than the previous fiscal. A healthy pipeline, broad-based deal signings, initial signs of up-turn in discretionary spending and good traction in annuity, traditional and transformational businessall these factors have collectively lent confidence to the company in estimating FY 14 to be a better year than FY 13. Clients have made plans towards IT spending with they seem to be having a better handle on the kind of projects they would want to execute and are aware of the macro environment, the note added.

Infosys

The countrys second largest software services exporter crossed the $2 billion quarterly sales mark for the first time and also raised the lower end of the guidance for revenue growth to 9% from 6% as anticipated earlier. Morgan Stanley observed that Infosys dollar revenue guidance now implies that the IT firm is set to achieve 15-20% year-on-year dollar revenue growth in FY15.

Despite an 8% increase in its wage bill, Infosys reported revenue growth of 3.8% to $2.06 billion sequentially in the three months to September. The IT major reported a net profit of $383 million, down 8.4%, sequentially on account of the provision made for the visa related case in US. In rupee terms Infosys reported a net profit of R2,407 crore registering a yearly growth of 1.6% while on a sequential basis it was 1.4%. The revenue for the quarter was R12,965 crore with sequential growth of 15.1% and yearly rise of 31.5%, boosted largely by the depreciation of the rupee against the dollar. Both onsite and offshore realisations improved sequentially and volumes were up 3.1% quarter-on-quarter.

Infosys CEO and managing director SD Shibulal said, During the quarter we witnessed broad-based volume growth, robust client additions, five large deal wins and increased sales momentum of our big data and cloud offerings. This growth is a result of our focus on execution, which helps our clients achieve their objectives.

Infosys adjusted margins were flat sequentially, at 23.6% (excluding visa-related provisions of $35 million), in line with expectations; while the tech heavyweight lost 300 bps on account of the wage hike, it gained 240 basis points from the weaker rupee. While analysts have been looking for better margins this has not happened despite significant currency benefits and better utilisationthe management believes that they will begin to trend up once growth is stronger.

Despite several senior-level exits over the past year, the Infosys management brushed aside worries on that count, asserting it had adequate management bandwith. The management, however, remained cautious on the financials in the near term, even after raising the revenue guidance, both in rupee and dollar terms. We remain cautious as we have seen volatility in the last eight quarters. It is not a secular trend yet. Two quarters are not a secular trend, said Shibulal

Infosys won five large outsourcing deals during the quarter with a total value of $450 million; with this, it bagged over $1billion of big outsourcing deals in the first half of the fiscal. The management indicated that the demand environment has improved both in the US and in Europe. In its guidance, Infosys has pencilled in a seasonally soft second half of a fiscalgiven the larger number of holidays. The company has also built in some degree of weakness in the retail space as also concerns around any potential impact of the shutdown in the US. It also observed that while the deal pipeline remains steady, closures might slow down slightly in the second half of FY 14.

Except for the India market, all the other geographies logged in positive growth. North America, the largest contributor to its revenues grew by 3.9%, while Europe rose by 5.2%. Infosys manufacturing vertical grew 6.8% sequentially, followed by energy, utilities, communications & services (ECS) at 4.7%. The IT majors largest contributor financial services grew by 2.9%, which was a shade lower than the companys overall growth.

Wipro

Wipro, which has been registering subdued earnings for almost two years now, managed to maintain the earnings momentum provided by TCS and Infosys by posting robust growth indicating a gradual turn around. The

IT major reported a 2.7% dollar revenue growth for the July-September, the highest sequential rise in the last seven quarters, backed by demand growth in major markets of US and Europe.

In rupee terms, the Azim Premji-led company reported a year-on-year growth of 28% in net profit for the second quarter. The software-services business, which the company separated from its consumer care and lighting and infra arm through a demerger effective April 2014, posted net profit of R1,932 crore during the September quarter, compared with R1,493 crore a year ago. Revenue for the quarter stood at R10,992 crore showing an annual growth of 19%.

We have plenty of work to do and we are in the process of execution. It is just the beginning of a journey, Wipro executive director & CEO TK Kurien said on the turnaround and added, We achieved a broad-based revenue growth across all industry verticals and continue to focus on executing to our strategy. The discretionary spend has witnessed a steady pickup and for us there has been a broad-based growth.

Still the growth lagged the 34% growth posted by TCS and 64% registered by HCL. The company has however bettered its OPM during the quarter, up 2.5% sequentially to 22.5%, the highest in the last three years. The earnings before interest and taxes (Ebit) for IT services grew 31% y-o-y to R2,264 crore. There are positive indicators on the global economy. Client confidence is on the uptick and we see it reflected in our results, Wipro chairman Azim Premji said.

In terms of geography, Americas grew 3.0% sequentially while Europe showed a 0.7% growth quarter-on-quarter. India and West Asia markets showed a growth of 5.5%. Among service lines, global infrastructure services grew 2.8%, business application services 4.6%, product engineering 3.5%; BPO recorded a growth of 0.4% sequentially.

HCL Technologies

Indias fourth largest software services exporter HCL Technologies reported a 18.7% rise quarter-on-quarter in consolidated net profit at R1,416 crore for the first quarter ended September 30, backed by robust growth in Europe and encouraging macro-economic conditions. The company had posted a net profit of R864 crore in the year-ago period. HCLs consolidated revenues grew by 14% sequentially at R7,961 crore in the July-September quarter this fiscal against R6,069 crore in the same quarter of the previous fiscal.

HCL continues to strengthen its position in the momentum markets of the industry with Europe crossing a milestone run rate of $1.5 billion reflecting a very healthy 23.6% growth y-o-y. This is the eighth successive quarter of HCLs story of profitable growth, HCL Technologies president and CEO Anant Gupta said.

Revenue grew by 3.6% in dollar terms for the company which continued to leverage its strength in the infrastructure vertical, which grew by 8.8% sequentially. Geographically, the rest of world grew by 3.5%,

Europe by 2.6% and Americas by 4.0% respectively. Financial services & manufacturing verticals grew at 6.9% and 5.4% respectively while life sciences & healthcare and public Services grew at 6.5% and 3.1% respectively.

Hiring and attrition

During the quarter, TCS added 17,362 gross employees and 7,664 net employees, taking its total employee base to 2,85,250. During the quarter, the attrition rate went up slightly to 10.9%, the lowest among the top players, from 10.5% in first quarter of this fiscal. For FY14, the firms gross hiring target is 45,000-50,000 employees, out of which 25,000 are campus hires. The utilisation level, excluding as well as including trainees, improved to 83.4% and 75.0%, respectively. Even with its aggressive hiring plans, the company targets to maintain its utilisation levels excluding trainees at north of 80%.

Infosys ended the September quarter with 1,60,227 employees, with a net addition of 2,964 against just 575 in the previous quarter. The attrition rate was higher at 17.3% against 16.9% in the last quarter. The big boost for Infosys during Q2 FY14 came from its utilisation rate, which stood at 77.8%.

Wipro has seen a marginal decline in headcount addition during the quarter, while the IT major said there is nothing much to read in this dip as non-linear growth will get reflected in employee productivity, it said. The IT services segment had 1,47,216 employees as of September 30, 2013. According to Kurien, hiring is unlikely to uniform with some quarters reporting a spike. Hiring will depend largely on the kind of business requirements, he said.

HCL Tech added 1,691 employees in the quarter taking the total headcount to 87,196, while its utilisation rate was 80.3%.