1. Fundamentals fixed on new path

Fundamentals fixed on new path

The export focused Indian IT services industry looked to be more on steady path.

By: | Updated: May 4, 2015 1:52 AM

The $146 billion Indian information technology (IT) industry saw one of the most challenging close to a fiscal with FY15 witnessing companies impacted severely by cross-currency movements and the dawn of new reality where the current business models are unlikely to sustain for long.  at least during the first half of the fiscal but the situation worsened during the later half with adverse movement of the Euro against the US dollar and the budgets for technology remaining flat.

itThe fourth quarter numbers for all the multi-billion dollar Indian IT services companies did not evoke much confidence among the markets or investors and they sounded even more cautious on their prospects for FY16. This was very visible with the downward stock price movements of the all the four major Indian IT services companies—TCS, Infosys, Wipro and HCL Technologies, when they announced their quarterly and full year results.

Gartner in its annual forecast for worldwide IT spending said it will decline 1.3% in 2015. On the IT services segment, which is the mainstay of the Indian IT industry, the analyst body said: IT services spending will contract slightly to $942 billion in 2015, down from $948 billion in 2014. The largest reductions were made in implementation services, particularly in the US. Although the oil and gas industry is only 1% of the IT services market, oil and gas buyers historically react quickly when their prices drop, often cutting back on spending 20% or more. Because the US is a large oil producer and a large market for IT services, the largest spending reductions on services is expected to take place in the US through 2015 and 2016, with an early impact on implementation services.

Leaving aside the cross currency movement, the biggest challenge being faced by these IT services companies will be on how they address a different kind of market requirement which is very unlikely to be met through the existing business model. This is a churn which is recognised by all the Indian companies and each one of them is employing a differentiated strategy to reach this goal.

TCS

Tata Consultancy Services (TCS), India’s largest IT services exporter has become the bellwether for the industry for quite sometime now managing to stay ahead of the pack despite its size. However, the last two quarters of the fiscal have not been very encouraging with the revenue growth remaining flattish. TCS ended FY15 with a revenue of $15.4 billion recording a growth of 15% and a net profit rising by 12.9% to touch $3.5 billion. However the quarterly sequential revenue growth remained flattish. The company has came out with a one time bonus for its employees which amounted to $423 million. Though on all parameters, TCS has maintained its stability there are certain niggling worries on the HR front with the marginal increase in its attrition rate. N Chandrasekaran, CEO & MD, said, “We have laid a strong foundation for growth in FY16. Our investments in platforms, digital and automation are gaining traction with clients and together with our market investments in USA, Europe and Japan, we are upbeat that the coming quarters will bring more opportunities to partner with customers across multiple industries. We remain focused on remaining relevant to our customers, our employees and the community.”

Infosys

Infosys is undergoing a transition under its eight-month-old CEO Vishal Sikka who has provided the thrust with the “renew and new” strategy through employing technologies such as artificial intelligence, automation, robotics, open source etc. Though quicker results was not expected out of them, the company has been trying to create a differentiated path which could define the way IT services will be delivered in the days to come. Infosys disappointed in terms of ending FY15, recording a growth 5.6% in US dollar terms at $8.7 billion which just about met the lower end of its guidance. The net profit grew by 15% in FY15 to reach $2 billion. Though the company provided a revenue guidance of 10-12% for FY16, what took everybody by surprise was its aspiration of reaching $20 billion in revenues by 2020 with an operating margin of 30%. Vishal Sikka, CEO, said, “We see the industry going through a fundamental and structural transition. Despite being a challenging quarter, I am encouraged by the early sucessess in executing our renew-new strategy on a foundation of learning.”

Wipro

Wipro which ushered in a major management change with the induction of a new chief operating officer had a muted end to the year. The company’s IT services revenue touched $7 billion for FY15 with a growth of 7% against 6.4% in FY14. The net profit increased by 11% in FY15 to touch $1.4 billion. Further, the company even provided a muted revenue guidance for the first quarter. The company is yet to reach the double digit growth rate mark but there seems to be some steady movement though the pace has not really picked up. TK Kurien, CEO, said, “We continue to execute on our strategy and have achieved improved customer satisfaction through better articulated solutions and improved delivery. We are well positioned to take advantage of the opportunities in the market, while tackling headwinds in certain areas.”

HCL Technologies

HCL Technologies net profit declined by 12% on a sequential basis for the quarter ended March 2015 impacted negatively by cross currency movements. The net profit during the period for India’s fourth largest IT services exporter stood at R1,683 crore.

HCL Technologies which follows the July to June fiscal year also recorded flattish sequential growth in revenue for the March quarter to reach R9,267 crore. On an annual basis, the net profit grew by 3.6% and revenues rose by 11%. Anant Gupta, CEO, said, “This quarter saw our revenue increase by 14.4% LTM (last twelve months) y-o-y in constant currency and we gained significant market share fuelled by transformational deal bookings in excess of $1 billion.”

The company also signed 14 deals during this quarter adding up to more than $1 billion of total contract value. HCL said its focus on enterprise digitalisation, industrial internet of things and next-gen ITO further fuelled the growth in this quarter.

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