Full recovery of IT sector not before next fiscal Q2

Written by Rachana Khanzode | Mumbai | Updated: Jul 23 2009, 05:34am hrs
Although IT companies have been posting positive first quarter financial results but analysts believe that IT sector will not witness stability before the second quarter of the next financial year. The top three vendors posted high bottomline by focusing on reducing costs and operational efficiencies. However, their topline has been under pressure because the revenues from new or expected contracts have not started flowing in.

TCS reported its net profit up by 19% year-on-year and 15% quarter-on-quarter at Rs 1534 crore, while its revenue stood at Rs 7207 crore, up 12% y-o-y and 0.5% q-o-q. Similarly, Infosys net profit was up by 17% y-o-y at Rs 1,527 crore, 5.3% lower q-o-q, with revenue at Rs 5,472 crore, a decline of 2.9% sequentially and 12.7% up y-o-y. Wipro saw a 1.3% sequential drop in dollar denominated revenue from IT services that has come in the backdrop of 3.3% rise seen in the case of TCS and almost flat growth for Infosys.

Gartner principal research analyst Diptarup Chakraborti said, Unless the topline grows, we cannot say that recovery has happened. Though according to these companies, clients back in the US and Europe are opening up, it will take at least two quarters for them to grab these contracts. According to Chakraborti, the actual revenues from these contracts will start flowing in by the next two months after that. After two major companies, Infosys and TCS came out with their financial results, the BSE IT index shot up to 7.26% closing at Rs 3759.61 on Monday, indicating market uplift. However, it remains to be seen if companies will be able to sustain this growth in the coming quarters. TPI Advisory Services partner & MD Siddharth Pai said, We dont expect any significant uplift in the next three quarters. Costs saving projects have definitely pushed the margins but there is a limit to squeeze it up. The business driven recovery is yet to receive a push.

During the quarter, IT firms took steps to cut variable pay component that comprises about 40% of the employees salary. Personnel costs to these companies are major expenses as employees are in huge numbers. A 15-20% in the overall expense can bring a major difference in the cost savings.

At the same time, IT firms have reduced their hiring plans drastically, indicating that they are not expecting large volumes to flow in the next three quarters. Revenues of IT companies are directly related to the number of employees, as volumes largely drive the business. TCS said it would hire 20,000-23,000 employees this year compared to 35,000 employees last-year.

During the quarter, TCS saw a net decline of 2,119 employees, while Infosys net addition declined by 995 and Wipros jumped up by only 711 employees. Infosys doesnt plan to hire this year.