With large vendors as also various governmental agencies loosening the noose around IT expenditure, a positive demand environment has been created across verticals, reviving discretionary spending cheering India?s IT services firms. Infosys missed out a bit, but others like TCS, Wipro and HCL have made up for it. The near term looks positive, as a result.
Pricing was seen as stabilising by and large, with companies hinting towards an upward tick. Hiring was also in full swing. Wipro, for instance, made its largest billable manpower addition ever during the quarter and others increased hiring guidance. Margins, however, were under pressure due to factors such as adverse cross currency movements, wage hikes, lowered utilisation and an unstable business environment in Europe.
The country?s largest IT company TCS, backed by a volume growth of 8.1% compared to the previous quarter, posted a better than expected 14% increase in revenue to Rs 8,217 crore. Net profit of the company was also above expectation, up 24.3% YoY to Rs 1,906 crore. The QoQ comparison, however, shows TCS?s profits to have declined 4.7%. Despite headwind from wage hikes and adverse cross-currency movement, analysts felt TCS managed margins well by increasing the fixed price project share in the total revenue by 40 bps to 49.1%, improving utilisation by 50 bps to 74.8% and controlling SG&A expenses.
Infosys Technologies, however, disappointed investors in Q1 with lower than expected numbers. Net profit at Rs 1,488 crore fell 2.4% against the year ago period as a consequence of currency volatility, wage hikes, and higher income tax expense. Revenues, backed by a strong volume growth of 7.6%, saw a 13.3% jump to Rs 6,198 crore from Rs 5,472 crore.
The firm?s operating margins declined by 1.8% to 28.3%, mainly because of currency fluctuations. During the quarter, the rupee appreciated 0.7% impacting margins by 0.3%. Cross currency movements had an 0.6% impact while lower billing rates hit margins by 0.3%. The impact from higher wages was 3%. The hit was partly offset by higher utilisation, which resulted in a 2.2% positive impact on the margins.
Infosys managed to ease off some of the negatives of its results by revising its guidance for the year. The revenue growth guidance was revised upwards from the earlier 9-11% to 16-18% YoY, and EPS growth guidance to 7.2-11.5% YoY.
While its volume growth at 4.7% was much lower than peers, Wipro Ltd.?s overall revenue hiked upwards at 16.1% to Rs 7,236 crore. Wipro?s net profit beat market expectations, growing at 31% YoY to Rs 1,318.6 crore. Wipro also scored with analysts on maintaining margins despite adverse conditions. Wipro IT services EBIT margin improved 37 bps to 25.5% backed by forex gain.
Analyst Asit C Mehta, Investment Intermediates says, ?The company positively surprised us on the margins front despite impact of wage hike for around one month, decline in off shore and on site billing rate, dip in utilisation rate by 90 bps QoQ to 78.4% and cross currency headwinds.?
HCL Technologies, the country?s fourth largest IT company saw its revenues rising 18% to Rs 3425 crore from Rs 2909 crore a year ago. The company, which follows July to June as its financial year, posted a 2% rise in net profit to Rs 1,303 crore for the year and Rs 341.8 crore for fourth quarter, up from Rs 330 crore in the year-ago period. But HCL?s profitability also was under pressure with lower than expected EBITDA margins as forex losses mounted to Rs 137 crore against Rs 88.6 crore a year ago.
HCL also said that an addition of more than 6,000 employees in the quarter pushed utilisation down by 200 basis points. A shrinking back office business and a looming European debt crisis posed concerns for the technology major.
According to reports, the quarter has seen a healthy growth in deal conversions particularly in sectors such as infrastructure, engineering services and policy-administration contracts across sectors like automotive, aviation, telecommunication and insurance. Some of the deals between the April-June period included Rs 4,200-crore UK government pension contract won by TCS, HCL?s Rs 2,350-crore deal with pharma major Merck to provide integrated services in near-shore locations like Raleigh, North Carolina, Poland and China.
Going by the performance of the companies according to industrial sectors, growth was more or less broad based, with demand picking up across the board. TCS attributed the up-tick in its volume to a balanced growth across all verticals, including energy and telecom. Wipro said that package implementation propelled the growth along with product engineering services and traditional application development maintenance. For Infosys, banking and financial services, retail, manufacturing and services such as application maintainence support were the key growth points.
Geographical growth, not surprisingly came from emerging markets, with demand from North America on a rebound. Growth in continental Europe was sluggish. Infosys? revenue from North America grew 17.8% year-on-year. Businesses from India doubled compared to the year ago period and business from the rest of the world was up almost 25%.
Compared to its peers, however, TCS managed better business in Europe, with a 1.3% QoQ business growth. TCS said that it expected growth to be led by emerging markets, followed by US and UK. In Continental Europe, deal closure is taking relatively longer time than other geographies. Hence the growth rate of the region will continue to lag in FY 11.
One of the highlights of the quarter was an upward hiring revision coming from some owing to high volumes expected going forward. Infosys revised its gross addition to 36,000 from 30,000. However, with markets opening up, the industry was also plagued with alarming attrition rates. Voluntary attrition at Wipro attrition rate was at 23% against 8.4% a year ago and 17% a quarter ago. According to company officials, this was the highest since the company was emerging from the dot com bubble in 2001. To control the spike in attrition, the company promoted around 20,000 employees and handed out restricted stock units to employees. Wipro officials said that it would take another two to three quarters for the attrition levels to stabilise.
According to a July report by Forrester, IT spending in the US is likely to be ramped up in the second half of 2010, with an overall increase of 9.9% over last year 2009 to $753 billion. In April, Forrester had predicted a 8.4% year-on-year growth.
Impact from Europe was predicted to drag down global IT spending to 2%, down from the earlier forecast of 5.2%. The Indian IT sector, which caters largely to the US, is viewing the American resurgence as a factor that is likely to offset a European crisis going forward.