Most IT firms missed estimates; this is what pulled down IT industry’s Q1 earnings

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Published: August 6, 2019 6:38:07 PM

Rising costs and falling realisations hit the Indian information technology industry hard in the last quarter, with almost all IT firms missing Q1 earnings expectations, barring Infosys, which barely met the street estimates.

NASSCOM, IT industry, revenue growth quarter, subcontract, global demand, investment, expense, profitThe tight labor market in the US, shortage of H-1B visas and rising attrition have increased dependence on subcontractors. (Bloomberg image)

Rising costs and falling realisations hit the Indian information technology industry hard in the last quarter, with almost all IT firms missing Q1 earnings expectations, barring Infosys, which barely met the street estimates, according to a report. While TCS and Infosys had robust revenue growth during the period, Wipro and Tech Mahindra saw a deceleration in growth. Increase in cost of visa applications pulled down earnings across the board, Kotak Institutional Equities said in the research report. Continued pressure on realisation; increase in subcontracting costs due to a shortage of visas in the US; a higher number of visa applications and certain large deal transition costs, were the major factors responsible for the slowdown in the IT industry in the last quarter, the report said.

Blame it on US

The tight labor market in the US, shortage of H-1B visas and rising attrition have increased dependence on subcontractors. The report further says that the subcontracting expenses as a share of revenues increased 80-240 bps y-o-y and is expected to maintain the level in the short term. Not only this, the moderation in growth and contraction in margin pulled down the year-on-year revenue growth of the mid-tier companies. The report suggests that the slowdown in growth from large clients and a few client-specific challenges resulted in weak results.

Hiring steady

There is a silver lining though. Despite the weak results, net hiring in most of the companies remained stable. Net hiring for TCS, Infosys, Wipro, and Tech Mahindra increased 13% y-o-y and utilisation levels were steady too, according to the report. However, attrition rates spiked 20-400 bps year-on-year in the first quarter.

Indian information technology sector generates $177 billion in revenue a year, according to NASSCOM. It is also responsible for an export of $136 billion a year, which makes it an important area for the economy.

Deals done

The revenue growth has slowed down, despite the companies’ strong momentum in deal wins. The report suggests that the winning of deals has been strong in the past four quarters and the total contract value increased by 4 to 123 per cent y-o-y on a trailing 12-month basis. 

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