The latest financial performance of the big three of Indian IT industry—Tata Consultancy Services (TCS) , Infosys and Wipro—underscores the fact that the macro-economic challenges still persist with business momentum not picking up and net profits dropping. In short, the prospects of a double digit growth rate is still far away. The first quarter of FY18 for this top three companies has been consistent on one point —declining net profits. If TCS’s net profit dropped on a quarter-on-quarter (QoQ) basis by 10%, it was 3.3% for Infosys and 8% in the case of Wipro. The twin factors which affected their bottomline performance were wages hikes and the appreciating rupee against the US dollar. According to a note put out by HDFC Securities, TCS witnessed a wage hike impact of 150 basis points (bps) while the rupee appreciation was 80 bps for the first quarter. A similar trend was also noticed for Infosys and Wipro.
It is very unlikely that the net profit growth rate would see a significant upward trend anytime soon given these companies’ existing cost structure is largely skewed in terms of its employee base. Added to this, the momentum of business has still not kicked in which could mean that there may not be larger volume of business flowing. Infosys has already indicated that it expects its operating profit margins (OPM) to be in 23-25% range while TCS saw a drop of 230 bps and in the case of Wipro it was down to 16.8%.
As Sanjoy Sen, Doctoral Research Scholar, Aston Business School, UK on the performance of TCS said, “The decline in top line and bottom line performance by TCS in the current quarter is reflective of current macro economic circumstances of uncertainty, currency fluctuations and shrinkage in IT spending on large global transformational projects, and cannot be considered unexpected in its entirety.” While efforts to increase top line have been ongoing for some time, they are unlikely to lead to miracles in terms of performance improvement in the short term. “This underscores the need for agile cost-cutting that will reduce costs immediately while not impairing performance,” he said.
The biggest challenge for these IT companies has been the uncertainty in macro-economic environment which has impeded the deal momentum. Added to this, there is also the pricing pressure on the conventional IT deals. For the Indian IT industry, the largest revenue generating vertical is the banking, financial services and insurance (BFSI) segment. In case of TCS and Infosys, this vertical has performed according to expectations though Wipro beat the trend. JP Morgan in its note following the Infosys results said, “Like at TCS, BFSI had a soft quarter growing barely 2% CC Q/Q in a seasonally strong quarter. The softness of BFSI at both TCS and Infosys has implications for FY18 growth for these firms as well as for the sector. Expectations early into CY17 of a BFSI-led cyclical uptick are not materialising.”
Indian IT companies now have the difficult task of managing twin platforms of growth. They cannot ignore traditional lineS of business like application, development & maintenance (ADM), testing, infrastructure or package implementation which could be constituted as the bread and butter of the business generating cash. At the same time, the newer realm of digital cannot be ignored where it is still a fledging segment with smaller deal sizes in the offing. Though TCS, Infosys and Wipro have made certain strides in this new line of businesses, it is still far away before they could be called mainstream. According to TCS, digital accounted for 18.9% of its revenue while it was 22.5% for Wipro. Infosys said that its six new service categories like cloud, artificial intelligence, internet of things accounted for $1 billion in revenue of the total $2 billion generated since April 2015.
The big focus area for the financial performance of these companies was on its human resources front, in the backdrop of various reports on layoffs in the industry. At the end of the first quarter of FY18, both TCS and Infosys actually saw their total employee strength reducing, though in the case of Wipro there was a positive net addition of people. However, there are still strong signs of optimism. According to Gartner, the worldwide IT spending is projected to total $3.5 trillion in 2017, a 2.4% increase from 2016. “Digital business is having a profound effect on the way business is done and how it is supported,” said John-David Lovelock, vice president and distinguished analyst at Gartner. “The impact of digital business is giving rise to new categories; for example, the convergence of software plus services plus intellectual property. These next-generation offerings are fueled by business and technology platforms that will be the driver for new categories of spending.”