Top tier Indian IT services firms ended fiscal year 2010 on a promising note after battling tough economic conditions in the first half of the year when enterprises around the world capped their IT budgets. Infosys did well to manage a 5% increase in its revenue to Rs 22,742 crore for the year ended March 31, 2010. India?s largest IT services exporter Tata Consultancy Services (TCS) did even better growing the topline by nearly 8% to Rs 30,029 crore fuelled by strong volume growth of 17% during FY2010. While IT bellwether Wipro grew its revenue by 6% to Rs 27,124 crore, year-on-year backed by recovery in technology and telecom sectors. The message at the end of the March quarter was clear?the worst is behind and although some parts of the world are still struggling with high unemployment and debt issues, enterprises are thawing IT budgets to prepare for the future.

The growth in the March quarter was broad-based, across verticals and geographies. Large deals are back on the table, deal conversion rates improved and firms reported strong client additions. TCS bagged 10 large deals during the quarter and added 39 new clients. Infosys added 47 clients during the March quarter?one of the highest additions in the recent past?and won five large deals, while Wipro, which has Citigroup, Cisco, and Credit Suisse among its leading clients, added 27 new clients during the quarter.

TCS executives noted that the deal pipeline in the quarters ahead appeared robust and there was ?tremendous momentum? in BFSI, retail, and life sciences. Infosys said it expected continued investments from bank restructuring as distressed financial services companies shed more assets. Encouragingly, troubled verticals such as manufacturing are also showing signs of a bounce back. For Infosys, manufacturing grew 10.2% sequentially.

HCL Technologies, which added 39 new clients during the third quarter ending March 31, 2010, witnessed positive growth from all geographies lead by US at 9.6% quarter on quarter (qoq), followed by APAC 7.9% and Europe 1.4%.

Profitability

For the fourth quarter ending March 31, 2010, TCS? revenue in rupee terms increased 1.1% qoq backed by 4% growth in volume. However, the positive impact on growth was largely curtailed by the 3.1% qoq impact of cross-currencies resulting in lower realisations, as the average rupee rate appreciated by 1.9% qoq against the US dollar for the company to Rs 45.9 in the fourth quarter, said Angel Broking. The company?s international revenue grew by 0.7% qoq to Rs 7,047.8 crore, while domestic revenue, which stood at Rs 688.7 crore grew by 6.2% qoq.

For Infosys the top-line growth across services and verticals was driven by strong volumes. The company recorded a 3.5% qoq revenue growth in the fourth quarter backed by a 5.2% qoq growth in volumes, despite a 1.5% qoq dip in blended pricing and the negative impact of a 1.6% qoq rupee appreciation vis-?-vis the US dollar. The annual revenue of the company for FY2010 was driven by a 6.7% volume growth.

However, on account of strong lateral manpower intake, increase in selling, general and administrative expenses (SGA) and a 70 basis point negative impact of the rupee?s appreciation against the US dollar, EBIDTA margins contracted by 148 basis points qoq, resulting in a lower growth of 2.2% in the net profit, noted Angel Broking. While for TCS EBIDTA margins increased 19 basis points in the fourth quarter fuelled by lower wage, better rate productivity and lower SGA costs.

S Mahalingam, chief financial officer and executive director, TCS said, the firm?s cost base has remained constant and it has leveraged this to support higher business growth.

?Looking ahead, we will continue our focus on managing costs and efficiencies while ensuring that investments are aligned to capture growth opportunities that emerge across the spectrum,? he said.

Wipro posted a 21% rise in its net profit to Rs 1,209 crore during the fourth quarter, on revenue of Rs 6,983 crore. Wipro Technologies, the flagship software services arm of the company which accounts for three-fourths of the topline, reported a growth of 7% to Rs 5,260 crore on a year-on-year basis. Sequentially, the topline moved up by 4.7%.

Wipro?s chief financial officer Suresh Senapathy said fourth-quarter was a satisfying period. ?We have driven up margins by 60 basis points despite headwinds of wage increases, rupee appreciation and the impact of cross currency,? he said.

The company also said during its fourth-quarter results that it will issue bonus shares in the ratio of 2:3? two additional shares for every three shares held by shareholders. The bonus shares will be issued after shareholders? approval at the company?s annual general meeting in July, the company said in a statement. Azim Premji holds a 79.54% stake in the company along with his family members.

Backed by IT spendingsoftware services firm HCL Technologies posted a net profit of Rs 344 crore, up 58%, for the third quarter ended March 31, against Rs 218 crore for the corresponding period last year, (for HCL July is the beginning of its fiscal year).

Revenue for the quarter stood at Rs 3,076 crore, up 7.5%, as compared to Rs 2,861 crore during the same period last fiscal.

?The results from HCL definitely reiterate that the last two quarters have seen significant new deal activity for the larger ITeS players. The closure of new deals shows that IT spending is back in the market and the apprehensions of larger clients to control their IT spends that existed 12-18 months is slowly easing,? said Karthik Ananth, director, market expansion, Zinnov Management Consulting.

Volume growth across verticals

With the global economy limping back to normalcy, different verticals of the IT companies are seeing businesses picking up its momentum. Among the various verticals that registered growth, TCS recorded a strong sequential qoq growth of 4.6%, 4.1%, 3.7% and 3.1% respectively, in life sciences, transportation, retail and distribution and hi-tech. In the service lines, it witnessed a strong sequential growth of 26.4%, 20.4%, 15% and 6.2% respectively, in asset-leveraged solutions, global consulting, assurance services and infrastructure (ITO). ?Though the company has started witnessing large transformational deals, the same are coming in a phased manner and will take few more quarters to witness strong ramp ups,? said an Angel Broking report.

In geographical terms the growth was led through a continued strong recovery in North America, which was up by 4% qoq, and 5.9% qoq growth in domestic revenue.

The company closed 10 large deals across services and verticals, comprising large deals of over $500 million and two deals of over $150 million each. TCS added 39 new clients during the quarter, while the contribution from top clients grew by a significant 83% in fiscal 2010 compared with fiscal 2009 mainly on account of acquisition of Citi Global Services.

Infosys? all-round growth is driven mainly by strong volumes across the services segment, with the company delivering a strong sequential growth of 13.1%, 10.2% and 26.3% in consulting and package implementation (PI), testing and products, respectively. India?s second largest software services exporter witnessed a strong growth of 4.1% in banking, financial services and insurance (BFSI), led by a 7.5% growth in the banking domain, while the manufacturing and transportation verticals grew by 8.4% and 3.5% respectively.

Although the financial world appears to be stabilising, IT spending in BFSI may remain flat or rise marginally this year. But for firms offering global delivery, there is enough growth prospects, feels Ashok Vemuri, Infy?s global head of banking and capital markets. ?The recession has created tremendous integration opportunities. There are several transformation deals related to M&A activity in the BFSI space and we will see a lot of traction in the sector,? he said. Of the 47 new clients added this quarter, 14 are from the BFSI space, taking the total active clients count to 575.

The top 25 client accounts of Infosys witnessed a 7.5% qoq growth. In the last quarter, Infy entered two large transformational deals of over $150 million in the consulting and PI services space. BFSI is the main revenue generating businesses for the company, contributing 35% of its overall revenues in the March quarter. In the year-ago period, the segment contributed 33%. From a geographical perspective, spends are likely to rise in Asia and Latin America in percentage terms, though the quantum of dollars spent in these regions is fairly low. ?The percentage growth will be startlingly high,? added Vemuri. However, the US and Western Europe continues to be the biggest market for the IT services company.

Commenting on the nature of deals Vemuri added that they are now more focused around CRM, mergers and acquisition, regulation, compliance and reinventing the bank.

?Our buyers have changed. Our services today are not just bought by technology people they are bought by businesses,? he said.

Finacle, the banking solution product from Infosys, added 10 deals during the fourth quarter, closing the year with 31 wins. Of these five were from Asia Pacific (APAC), five were from Europe, Middle East and Asia.

For HCL Technologies, revenue from the key industry sectors grew this quarter with financial services (5.5%), manufacturing (10.5%), media publishing and entertainment (16.3%) and life sciences (10.2%) leading the growth.

Hiring is back

The uptake in business volumes across the IT services sector has now brought the hiring and wage hike cycles back, a development that has implications across many industries?from computer equipment makers to real estate companies. TCS said it is doling out a 10% salary hike for Indian employees and 2% for onsite employees, effective April 2010. Infosys announced a wage hike of 14%-17% in India and 2%-3% onshore.

During the fourth quarter, TCS added a gross of 16,851 employees, while the net addition was 10,775, taking the total headcount including subsidiaries to 1,60,429 employees. The company made 20,000 campus offers for FY2011.

?In FY10, we have been through an entire business cycle where controlled hiring in the first two quarters gave way to rapid recruitment in the last two quarters,? said Ajoy Mukherjee, vice president, head, global HR, TCS.

According to analysts, the announced promotion would have an impact of around 3% on employee?s cost effective from June 2010. ?Besides the wage hike announcement of April 2010, TCS management does not expect any further wage hike during FY11,? said Asit C Mehta.Infosys is also aggressively hiring to ready its growth engine.

The firm not only plans to add 30,000 to its workforce this year, but also has restructured its HR practices for better talent management.

The firm has made 19,000 campus offers for the year already. Lateral recruits would total 6,000 and the company plans to add about 2,000 in places like China, Philippines, Eastern Europe, Europe, and the US across the verticals. The company is spending about $134 million this year on wage hikes and promotions. It had 7,500 promotions effective April, 2010.

During the fourth quarter results HR chief Mohandas Pai said that Infosys has enough ?employable? people to cash in on the growth. ?About 7,000-8,000 people are undergoing training; 2,000-3,000 are in-between projects. We have enough people to handle the growth. That?s why we grew more than what we budgeted for in the last two quarters,? he said.

India?s No. 3 software services company Wipro absorbed 5,325 employees during the quarter to take its total employees to 1,08,071 in March. Software services firm HCL Technologies also plans to hire 5,000 people this year, the company said during its third-quarter results ending March 31. (For HCL July is the beginning of its fiscal year). The company also said that it will go for a wage hike in July this year. During the quarter HCL made a gross addition of 7,136 employees, taking its total headcount to 58,129.

Looking forward

Overall positive results from the major IT services players in the country shows that the industry is back on track. Analysts see this as an encouraging trend going forward. ?Stability has returned to the global markets and customers have much better clarity on their IT budgets and overall IT strategy,? said Ananth from Zinnov.

Strong sequential revenue growth, aggressive hiring plans and positive business outlook indicated by the leading players in the industry shows that the worst is behind for the Indian IT sector. ?We believe that the IT companies will register strong top-line growth of 20% plus over FY2010-12, however the growth in rupee terms would be lower due to 500 basis points decline in the rupee realisations,? said Rahul Jain, IT analyst, Angel Broking.

?We are expecting INR/US dollar in the narrow band of 44-45 in the coming period. The focus would not shift to the profitability as the companies would see some pressure on account of wage inflation, strong hiring and rising tax rate,? he said. IT companies have shown strong margin resilience in the past by maintaining their profitability. ?However, we believe margins to decline by 200 basis points over next two year which may result in earnings per share (EPS) growth of 12%-14% over FY2010-12,? added Jain.