The fourth quarter results in the Indian information technology sector have thrown up at least two significant thoughts for us to chew on. First, TCS has pulled away from the rest of the pack and the game has now become TCS versus the rest of Indian IT. While TCS grew 8% in FY10 and 24% in FY09, Infosys managed to grow only 5% and 21% in the last two years, respectively, and the last quarter continued that trend. The second aspect has been the less than impressive showing by some of the hotshots?Infosys missed its profit estimates for the third time in four quarters and Wipro provided a shockingly muted guidance (-0.4 to 1.5%). Although TCS and HCL have covered up for the rest of the tier-1 set to some extent, there is no denying the fact that the immediate future of the
Indian software industry looks a little ragged. And unexpectedly so.
However, many of the software sector analysts are expecting to see stronger demand for IT services over the next four quarters. They have based their analysis on the larger global picture and how companies like Accenture and Oracle have been going about their business. Research firm Forrester has raised the forecast for the US technology market to 8% from 7.4% for the year 2011, and that?s encouraging. Analysts worldwide are predicting that enterprise purchases will grow faster than small and medium size business buying, and verticals like manufacturing and utilities will outpace government, retail, media and leisure.
In India, only TCS is in a position to share that kind of optimism. The Street has upgraded TCS?s earnings in 6 out of the last 7 quarters and that trend is likely to sustain after the current quarter report as well. ?TCS continues to show urgency in reducing operational flab and is steadily closing the margin gap with Infosys, while inching ahead on revenue growth,? CLSA said. TCS?s 4.7% quarter-on-quarter growth in dollar revenues should allay fears of an industry-wide demand flux, created after the Infosys report. ?We see the TCS result and management commentary increasing investor confidence on sustainability of Indian-tech order books through 2011,? added the CLSA note.
But the same is not the case with Infosys or Wipro, which are just about managing to keep their heads above water. Angel Broking said that Infosys?s sluggish performance was because of the lack of budget flush from few clients due to unstable macros resulting in lower utilisations. CLSA was harsher in its comments, stating that Infosys?s March quarter report was extremely poor, missing the most pessimistic expectations. With regard to Wipro, Kotak Securities said the ongoing restructuring affected its margins and outlook. Analysts uniformly slammed Wipro?s muted outlook for the first quarter, though CEO TK Kurien said the guidance was given out keeping in the mind all the transformation that was going on within the company.
The hard truth is that the Indian software industry has entered a phase where high competitive pricing and the resultant cost pressures, together with higher wages and taxes, have become a harsh reality. IT budgets in Europe are still to recover from recessionary shocks and budgets of American banking clients have just started to return to normalcy. Foreign exchange fluctuations have not helped either. A Motilal Oswal note said that pricing and productivity are expected to remain flattish from the current levels through FY12.
Despite that, analysts are expecting top IT companies to deliver a 25% sales growth in FY12. Some experts with a more optimistic bent of mind say that Infosys?s performance is an exception and point towards client specific issues as the reason for a 1.4% volume decline in Q4. Infosys is known to maintain high margins on deals even at the cost of high profile contracts. HCL posted a 4.8% volume growth while TCS recorded a 2.9% growth in volumes. Wipro?s volumes grew 1.9% sequentially. So, clearly, things have not come to a halt.
In fact, HCL Technologies was the surprise packet in Q4, crossing the $100 million per quarter milestone. The highlight of the quarter was the strong margin performance by the company, whose EBITDA margins improved by 100 basis points sequentially to 17.3%. ?On the other hand, increase in spending in the transformational projects has also benefited HCL Tech in winning more deals,? said ShareKhan in a note.
Overall, it has been a mixed bag. It may not have been the quarter one bargained for, but the future is not without hope. The immediate fate of the top tier Indian IT vendors will depend on how the titans of IT spending like AT&T, BT and the powerful American banks open up their purse strings this quarter.
dj.hector@expressindia.com