1. Resurgent quarter for Indian IT

Resurgent quarter for Indian IT

IT services majors Infosys and Wipro beat Street expectations in the December quarter, a traditionally muted period for business because of furloughs and holiday season, while TCS missed the expectations by a whisker. The company, however, maintained a healthy lead over Infosys and Wipro, posting revenues and net profit almost double that of the competition, and emerging as the country’s most profitable company steering ahead of Mukesh Ambani’s Reliance Industries

By: | Updated: January 26, 2015 5:11 AM

IT services majors Infosys and Wipro surprised the markets by an above expectation performance in a traditionally weak December quarter due to holiday season and extended holidays. TCS, which has rallied past competitors consistently, missed Street expectations, though the company had earlier cautioned the analysts against heightened expectations. However, the higher analyst expectations were largely due to the company’s historically market beating growth rates. TCS attributed the sluggish pace to headwinds in the retail, energy and insurance sectors, apart from cross currency movements, even as the IT services major surpassed Mukesh Ambani’s Reliance Industries in quarterly profitability, making it the country’s most profitable firm in the December quarter. TCS posted net profit of R5,444 crore against RIL’s R5,256 crore.

A resurgent Infosys, under the stewardship of CEO Vishal Sikka, beat Street expectations for the quarter, riding on a sequential volume growth of 4.2%, its best ever in three years. The company also maintained its revenue growth guidance of 7-9% against analysts’ expectations that it will be revised downwards. It added another landmark in utilisation rates, which stood at 82.7%, an 11-year high. The company is looking to shed its conservative approach towards acquisitions, with Sikka announcing a five-fold increase in its start-up fund from the present $100 million to $500 million. The company is sitting pretty on liquid assets worth $5.5 billion.

Wipro was the biggest surprise among the trio surpassing Street estimates in the December quarter, on the back of secular growth across all verticals, especially the healthcare and life sciences businesses. The company, however, will see old guard Suresh Senapaty, the chief financial officer, retire on March 31 on attaining the age of superannuation, after a three-decade association with the company. Senapaty, who is also an executive director, will relinquish his Board position as well. Jatin Dalal, senior vice-president, finance, will take over as the CFO from April 1.

Infosys reported a 2.2% sequential increase in net profit to $522 million even as the company continues to work on its “renewal” strategy. The management, however, indicated that pricing was under pressure in the traditional services. The operating margin was up at 26.7%, an increase of 60 basis points (bps) sequentially and 170 bps year-on-year, ahead of forecasts helped by cost optimisation and a depreciating rupee.

IT service, Infosys, Wipro, TCS, Mukesh Ambani, Reliance Industries, Vishal Sikka

“My sense is that you will continue to see downward pressure on prices. For the lack of a better phrase, we can attribute that to delivering yesterday’s services and I believe that time for that has come to an end. It will definitely take some time to wind down, nonetheless, the long term picture is very clear and the future is in looking for more innovation, more productivity and automation. The more we can do in those direction, the better,” said CEO Vishal Sikka.

Infosys’ consolidated net profit for the quarter grew 12.7% to $522 million from $463 million in the year-ago period. Sequentially, profits grew 2.2% from $511 million in the July-September stretch. Revenue for the quarter was at $2.21 billion, a year-on-year growth of 5.6% from $2.1 billion and a sequential increase of 0.8% from $2.2 billion.

Infosys and its subsidiaries added 59 clients during the quarter. Financial services and insurance, the largest business segment for Infosys, grew by 1.8% sequentially while manufacturing posted growth of 1.4%. Retail and life sciences grew 1.1%, while energy, utilities, communication and services declined by 1.9% quarter on quarter. North America, which contributes 61.6% in revenues for the company, grew by 2.1% sequentially while Europe declined by 2.1% during the same time period.

“Infosys declared a good set of results with margin performance being the key highlight of the quarter,” said brokerage house JP Morgan. “For recovery stories such as Infosys, we need to monitor the trend of leading indicators of improvement than revenue recovery itself. In this context, we see the leading indicators of improvement at Infosys over the coming 2-3 quarters reflected in declining attrition, increased net hiring, sales and marketing investments, and improvement in client progression metrics. On most of these, we saw
improvement in this quarter.”

TCS posted a 5.1% year-on-year increase in net profit for the quarter to R5,444 crore. On a sequential basis, net profit and revenues rose 2.9%. TCS’ turnover for the December quarter stood at R24,501 crore, up 15.1% over the earlier year.

“We did seven large deals across five sectors and the deal pipeline is very strong,” TCS chief executive and managing director N Chandrasekaran said, adding that the firm had seen a growth of 2.3% in prices during the quarter while volumes had also grown.

In dollar terms, revenues grew 14.3% year-on-year to $3.93 billion. The company’s operating margin came in at 27% for the December quarter against 29.7% in the year ago period and 26.84% in the September quarter. Its operating profit rose 4.6% over the previous year to R6,624 crore.

“Growth in the third quarter (October-December) was driven by industries like telecom, hi-tech and life sciences. Europe led growth, driven by investments made in that market, while North America also grew during the quarter,” TCS said in a

Wipro reported a 5.23% sequential increase in net profit to R2,193 crore, on the back of secular growth across verticals, especially healthcare and life sciences. The Azim Premji led firm achieved its guidance of 2-4% revenue growth in dollar terms, with a 3.7% sequential rise for the quarter in constant currency terms. The company guided for 1-3% growth in IT services revenue for the January-March stretch. Operating margins for the IT services’ margins finished up a tad lower at 21.8% owing to currency volatility. IT services revenue rose 3.9% to R11,344 crore in the quarter.

“We had a very satisfying quarter in terms of sequential revenue growth. We continue to see strong deal momentum,” said TK Kurien, executive director and chief executive officer of Wipro. “After many quarters, every business unit has performed. We have won eight sizable deals. The deal pipeline is strong and we are bullish about next year.”

Wipro’s healthcare and life-sciences business outpaced other verticals with a 6.1% sequential growth followed by the retail, consumer goods and transportation vertical which grew at 2.7% during the quarter. One of its key verticals, energy, showed a decline of 0.9% which the management said could be mitigated by tailwinds in other sectors.

“With the oil prices going down, there will be a reduction in capital budget. Whatever decline we anticipate is accounted for in the guidance.

When oil prices come down, major players tend to outsource more, which is an opportunity,” said Kurien.

Human resources
TCS added 16,561 employees on a gross basis, and 4,868 employees on a net basis during the December quarter and said that its total hiring in fiscal 2015 was likely to exceed the target of 55,000 employees it had set for itself. Ajoy Mukherjee, TCS executive vice-president and global head of human resources, said that the company had already hired around 52,500 people during the fiscal and its manpower utilisation rate stood at 86% (excluding trainees).

Infosys saw 8,927 employees leave the company during the quarter as against 10,128 in the July-September stretch. As an average of the last twelve months, however, attrition rose marginally to 20.4% with the management saying it would a few more quarters for it to stabilise. Infosys had a total employee strength of 1.69 lakh in the quarter ended December which saw a net addition of 4,227 people. UB Pravin Rao, chief operating officer, said, “We have made a 100% variable payout for Q3 and have seen a further decline in attrition as a result of multiple initiatives taken over the last few quarters.”

Wipro’s IT services business had a headcount of 1,56,866 at the end of December. “The gross utilisation has come down this quarter because it is a period of high leaves. Given the growth and plan for hiring, there is no issue operationally but there is ample headroom for growth,” said Saurabh Govil, senior vice-president, HR.

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