Banking, financial services and insurance (BFSI) industry has always been a harbinger of things to come for tech majors. The largest outsourcer to the $50 billion software services industry, BFSI was the first casualty of the global economic crisis. This vertical is the also the first to bounce back and show a recovery.
Growth registered by most of the top IT companies in the second quarter of the financial year (ending September 30, 2009) came on back of the new deal flow in the BFSI vertical.
India?s top three IT firms?TCS, Infosys Technologies and Wipro (IT services) reported an average increase of 5% in revenues year-on-year and a 3% sequential rise during the second quarter. The managements of these companies confirmed that IT integration work post the mergers and acquisitions in the banking sectorhas led to this volume growth.
As tech majors celebrate the recovery, analysts are already wondering how long will the growth riding on M&A integration work sustain. Moreover, mergers of some of the high-spending banking clients of these companies would mean fewer active clients and therefore lesser business in the long run. We spoke to industry leaders and analysts to do a reality check.
Analysts who track the technology sector feel the sequential and the year-on-year growth registered by TCS in BFSI is the best indicator of the recovery in the sector as among the top players, its share of BFSI to the total revenues is the largest. India?s largest IT firm, which reported revenues of Rs 7,436 crore in Q2, increased the share of BFSI from 43.9% in the first quarter to 45% in the second quarter. The contribution of the vertical to the company?s revenues in the same period last year was 41.9%.
Infosys, India?s second largest software firm, saw a sequential growth of 4.6% in BFSI. It also agrees that the second quarter has been strongly supported by BFSI, but it is still a little cautious of the environment. Ashok Vemuri, senior vice-president and global head for banking and capital markets business at Infosys says, ?It has only been one quarter. The jury is still out on whether it is sustainable. Clients are looking at more solutions and transformational kind of deals. Clearly, there is a strong desire to convert some of the conversations into transactions. But, I will not get too ahead of myself and say that we see an exit. But from the macroeconomic indicators and the client conversations, we are still in the woods to some extent. I will wait for a couple of quarters for us to categorise it as really sustainable.? Girish Paranjpe, joint CEO of Wipro IT business says, the company reported negative growth of 1% in the vertical. It claims that revenue growth came in a fairly broad-based manner, with several of its key verticals like energy and utilities, media and entertainment, healthcare, retail and FMCG showing growth. Paranjpe says, ?There is a little of a phased lag in the sector. But, we are seeing strong volumes since the end of September. In the third quarter, we expect a pick-up in demand.? However, he is more optimistic about the new deal flow. ?All the integration work coming in will not be finished in one quarter, and it can even stretch to an year in some cases.? Like Vemuri, Paranjpe also agrees that these mergers mean lesser number of clients in the long run, however, new development and the replacement cycle will make up for the loss. ?The financial services sector will also be a lot more regulated post the downturn, which will open a new set of opportunities for us,? he adds.
However, HCL Technologies, which despite reporting a 28% year-on-year growth in revenues at Rs 3,031 crore maintains a very cautiously optimistic approach to the demand situation. The company?s burgeoning forex losses pulled down its net profit by 10% y-o-y at Rs 320.1 crore for the second quarter. When asked its CEO, Vineet Nayar, disregarded the growth on back of M&A integration work theory. ?I have not said it and I don?t believe in it,? he was quick to say.
According to Nayar, there has been a recovery in demand, but it is largely on back of vendor change and consolidation. He still expects deal pipelines to be soft over the next three quarters till 80% of the S&P 500 clients don?t start to report positive growth. ?The moment that visibility is there, the discretionary spend will come up. So, the next growth cycle will be more transformational and discretionary. It is possible that growth may come back early or even later. What I am saying is that I see nothing to spark a celebration. We should be cautiously optimistic,? Nayar avers.
Market analysts feel that HCL Tech?s different take from what the other top players have to say about recovery in BFSI is probably due to the fact that the company is not seeing a lot of mergers and acquisitions among its banking clients. But, Nayar agrees that financial services along with other customer facing sectors will see the fastest recovery whenever it happens.
However, the state of revival in other key verticals such as retail, telecom and manufacturing is yet to be clear. For instance, Infosys reported a sequential and yearly (between 3-4%) decline in manufacturing, but Wipro posted a 4-5% growth in that vertical. ?The second quarter was about BFSI recovery. However, by the third quarter the BFSI story will be known. The next quarter results will really be about performance of other key verticals as this quarter has been a mixed bag in terms of verticals other than BFSI performing differently for different companies,? says an IT analyst with brokerage firm IIFL.
In line with its habit of under-committing and over-performing, Infosys guided for a very conservative third quarter despite the cheer in the market. The company guided for a year-on-year decline of 6.2% to 5.4% for the third quarter with expected revenues to be in the range of Rs 5,429 crore and Rs 5,476 crore. However, it shifted its expected revenue growth for the financial year 2009-10 from the negative terrain to an expected positive growth of between 1.2% to 1.7%.
Infosys CEO S Gopalakrishnan says that for the calendar year 2010, IT budgets are expected to be flat and may even see a marginal increase of 1-2%. However, the good news is that they are unlikely to decline, which was the case in the present calendar year. The street was surprised by the guidance given by the company with some analysts even terming it ?unrealistic?. Wipro on the other hand, was far more optimistic about the future as the company guided for a 2.5% to 4.5% increase in its revenue from the IT services in the third quarter ending December 31. It expects revenues from IT Services to be in the range of $1,092 million to $1,113 million.
However, the street gauged the change in sentiment from the fact that most of the top companies announced hiring plans and some even announced salary hikes. Infosys said that it will take on board 2,000 laterals in the next two quarters in addition to 18,000 freshers already recruited for the present fiscal. Not just that, the company also announced an average 8% hike to its employees in India and 2% hike to its overseas workforce. Wipro too, plans to take on board more laterals as the demand situation improves. The company also expects 7,000 to 8,000 fresh hires to join the company between the next one month and March 2010.
While TCS has decided to pay out 150% of the quarterly component of the variable pay to its Indian employees, it will add 8,000 new professionals in the October-December quarter. Not to be left behind, HCL Tech announced a salary hike of upto 0%-10% but continues to hire just-in-time.
Amidst all the euphoria, the weakening of the dollar against the rupee and other major currencies like the euro, pound and the Australian dollar continues to keep the CFOs of IT companies on their toes despite the fact that the current currency positions proved beneficial to many of the IT companies. Infosys CFO, S Balakrishnan says that the current appreciation of rupee against the greenback could play spoil-sport. The company has $699 million hedges in place out of which 10% are cross-currency hedges. He adds that the company will have to take more cover if the strengthening continued.Even HCL Tech has come out with a hedging policy whereby they will hedge only for the short-term after suffering heavy forex losses for many quarters in a row as they had hedged for 13-14 quarters in late 2007.
