The business growth in America, the largest market for the Indian IT biggies, showed a promising start to the fiscal while the European continent fuelled some large transformational deals for them. Buoyancy in outsourcing demand and increasing confidence among clients is driving hopes for a better year.
It was quite an eventful quarter for the $76-billion Indian IT-services industry. While the sector has ably weathered the side effects of the sluggish global economy, currency fluctuations and ongoing sovereign debt crisis in the Euro zone, it recorded encouraging earnings during the April-June stretch. The proposed US Immigration Reform Bill, however, remains a looming threat until further clarity on the final Bill.
With a healthy deal pipeline, uptick in discretionary spend and improved client confidence, the first-quarter results of the country’s top-tier IT firms indicated an early sign of an upturn in outsourcing demand form its largest markets.
While the American job creation data for June revealed a positive trend as the world’s largest economy added a net 195,000 new jobs and its jobless rate remained constant at 7.6%, the European continent fuelled some large transformational deals for the IT majors during the quarter despite the region’s macro-economic concerns.
For the blue-chip IT firms, broad-based growth across business verticals and geographies was the common trend seen during the quarter and some projected a strong year ahead, while the others kept a conservative outlook. The country’s largest software-services exporter TCS expects the calendar year to be better than last year in terms of global IT spend. However, its closest rival Infosys maintains a ‘cautiously optimistic’ approach. Wipro, which projected a 2-4% growth rate for the second quarter of the current fiscal, sees a higher confidence among its clients backed by positive macro-economic developments in the US.
HCL Technologies, whose revenue crossed the R25,000 crore mark, recorded a 22% growth during its financial year ended June and won 12 multi-year contracts amounting to over $1 billion during the April-June period, indicating buoyancy in the outsourcing market. The Delhi-headquartered IT firm follows July-June financial year.
After a long spell of sluggish growth, Infosys managed to pep up the markets by keeping its FY14 dollar revenue outlook intact while beating Street expectations with a 3.7% rise in net profit for the quarter ended June. The announcement was the first since NR Narayana Murthy’s return as executive chairman.
TCS, which was the most optimistic about the business environment for the rest of the fiscal, recorded the highest volume growth of 6.1% for the quarter among its peers, followed by its nearest rival Infosys at 4.1%. Analysts feel that TCS’ growth over the last few years has been broad-based, spanning across industry verticals. Some felt it was the booster dose the IT major got from its backbone financial services and insurance vertical that led to the industry leading growth. During the June quarter, banking, financial services and insurance (BFSI) vertical contributed 43% to the overall revenue.
“TCS and HCL have been performing well in the past quarters even when Infosys and Wipro were struggling. Now that Infosys seems to be getting its act together in the commoditised businesses and Wipro maintaining a very positive guidance for the next couple of quarters, it is looking good for the Tier I as a whole,” said Sundararaman Viswanathan, engagement manager, Zinnov. The Indian IT industry, however, has several challenges ahead of it including immigration reforms on which there is no clarity yet.
Tata Consultancy Services (TCS) recorded a 5.9% sequential rise in net profit for the first quarter ended June. Profit during the period stood at R3,831 crore as against R 3,616 crore in the previous quarter, while y-o-y (year-on-year) it was up 15.5%. During the April-June stretch, the company posted revenue of R17, 987 crore up 9.5 % and 21 % year-on-year.
In dollar terms, TCS reported revenue growth of 4.1% q-o-q (quarter-on-quarter), while it jumped 16% y-o-y at $3.16 billion. For the April-June stretch, volume growth stood at 6.1%, ahead of its peers.
According to analysts, a large part of the revenue growth during the quarter was driven by international business. Business from India remained sluggish and declined by 10% sequentially during the quarter led by seasonality and weak macros.It was in the second quarter of FY13 that TCS overtook its closest rival Infosys in operating margins and since then it has consistently maintained this difference. Analysts say an improvement in terms of utilisation rate and deploying a lower employee wage base have led to better margin performance for TCS.
“TCS’ Ebitda and Ebit margins improved by 29 basis points and 51 basis points q-o-q to 28.6% and 27.0%, aided by 5% q-o-q currency depreciation and absence of one-off costs related to settlement of the visa case, and despite wage hikes that were implemented starting April 1, 2013,” said Angel Broking. The country’s largest software-services exporter pointed out that growth during the quarter was across all industry segments led by life sciences, retail, telecom and BFSI. The company’s anchor verticals banking, financial services, and insurance (BFSI) maintained its growth momentum with revenues growing by 2.9% q-o-q. The IT major expects growth in BFSI, which is the company’s anchor industry segment, to be at least in line with the overall company’s average in FY14.
According to an Angel Broking note, three service areas led TCS’ growth during the first quarter including global consulting (17.5% q-o-q growth), assurance services (8.1% q-o-q growth) and engineering and industrial services (6.4% q-o-q growth). Each of these verticals have collectively accounted for 36% of the incremental revenue during the April-June period.
During the results, TCS indicated that the deal pipeline is robust for services such as application development and maintenance (ADM), infrastructure management, consulting, enterprise services, and products. Geography wise growth was largely led by the US and Continental Europe, the revenue from which grew by 5.9% and 9.6% q-o-q, respectively. The IT major expects growth momentum in North America to continue to remain robust and of the total 10 large deals signed during the June quarter, 7 were from the North America region. Revenue from UK and Latin America grew by 5.4% and 4.1% q-o-q.
Infosys, the country’s second largest IT services company, posted a net profit of R2,374 crore for the June quarter, helped by growth in business volumes and the rupee depreciation which offset the impact of the decline in pricing over the previous quarter. In sequential terms, profit declined 0.8%.
During the April-June stretch consolidated revenue grew 17.2% on a y-o-y basis to R11,267 crore while the growth in sequential terms was 7.8%. While pricing declined 0.7% from the previous quarter, the volumes grew 4.1% during the period. The operating margin was flat at 23.6%.
In dollar terms, the company’s net profit grew 0.5% y-o-y to $418m while it declined sequentially by 5.9%.
Infosys posted 13.6% increase in revenue to $1991m against the year ago period. The sequential growth was 2.7%.
“The company’s Ebitda and Ebit margin inched up slightly by 2 basis points and 9 basis points q-o-q to 26.5% and 23.6%, respectively as the gains from rupee depreciation got absorbed due to negative impact of wage hike given to sales team from May 2013 and onsite wage hikes given in February 2013,” Angel Broking said.
Infosys pointed out that growth was broad-based during the quarter, led by higher growth in North America and greater business momentum in verticals like manufacturing,
retail and consumer products. During the April-June stretch, North America contributed 61.4% to overall revenue compared to 60.2% in the previous quarter.
India’s third largest IT-services exporter Wipro posted a sequential rise of 3% in net profit for the April-June stretch, while revenue from IT services recorded a meager 0.2% sequential growth during the period. However, the Bangalore-based IT firm’s revenue for the quarter was in line with Street estimates.
In rupee terms, Wipro reported a net profit of R1,623 crore for the first quarter which was a growth of 11% on y-o-y basis. Profit of R1,576 crore from the preceding quarter was solely from the IT business as the company undertook a demerger process which was effective from April 2014. Revenue for the quarter stood at R9,735 crore.
In dollar terms, the IT firm reported a revenue of $1,588 million as against $1,585 million in the previous quarter. The financials of Wipro reflect the demerged business where the company separated the IT and non-IT business with the latter becoming an unlisted entity.
Wipro CEO T K Kurien said, “We are seeing a pickup in large deal closures which has reflected in strong order book in the current quarter.” For the second quarter of FY14, Wipro guided strongly reflecting the growing buoyancy in the sector. The company provided a revenue outlook of $1620-$1650 million translating into a growth rate of 2-4%. The Wipro CEO remarked that it was one of the highest guidance they have provided in the recent times.
According to Religare Institutional Research Wipro’s quarterly dollar revenue growth guidance of 2-4% is a positive and indicates a growth recovery. “While Wipro has invested in a turnaround, it needs significant support from higher spends,” the brokerage house noted. During the April-June period, the IT major, saw a negative growth in most of its verticals other than energy, natural resources and utilities that grew 3.7% sequentially and finance solutions, which grew 0.8%. Other verticals including global media and telecom declined by 1.1%, manufacturing declined by 0.8%, healthcare by 2.3% whereas retail, consumer goods and transportation showed a negative growth of 0.4%.
In terms of geographies, Asia Pacific and other emerging markets grew a robust 5.2% while Europe showed a 1.9% growth sequentially but the major market of Americas showed a decline of 0.7% while India and Middle Eastern markets showed a negative growth of 6.7%.
HCL Technologies, posted a 16.3% rise in sequential net profit for the April-June period, while y-o-y profit jumped 41.6%. Net profit for the quarter stood at R1,210 crore. In dollar terms profit was up 10.9% sequentially to $214 million from $192.7 million.
The country’s fourth-largest software services exporter recorded revenue of R6,944 crore, up 8.1% and 17.3% y-o-y. In dollar terms, HCL Tech posted a 3.1% rise in sequential revenue for the quarter ended June at $1,228 million.
For the full-year ended June, the IT firm posted profit of R4,099 crore, up 62.3% y-o-y. Revenue for FY13 stood at R25,734 crore, a rise of 22.4% annually. HCL Tech follows July-June financial year. In dollar terms revenue was up 12.9% for the year ended June at $4.7 billion, while net profit increased 50.5% to $746 million.
Daljeet S Kohli, head research, IndiaNivesh Securities pointed out that the IT firm’s strong quarterly performance was largely backed by 8.6% q-o-q growth in infrastructure services, which was about 30% of overall revenue.
Analysts said that software services saw the lowest growth among the segments with about 0.6% sequential growth in revenues to $788 million. “The only concern that remains with the company is soft growth in core software services since last three quarters and we wait for management commentary on this,” said Ankita Somani, IT analyst, Angel Broking, adding that HCL Technologies is outperforming many of its peers companies.
“Previously, operating margin of this company has always been a concern and now management’s focus to improve this has been paying off,” said Somani. The company has been able to increase its operating margins since last five quarters and during the June quarter EBIT margin grew by 118 basis points sequentially to 21.0%.
During the April-June period, the firm booked in excess of $1 billion including 12 multi-year deals even as new client relationships declined from 50 to 36. Over 90% of these deals are from re-bid market and more than 50% are integrated deals. In fact, the share of top-five and top 10-clients, too, declined sharply during the period.
“An exceptional growth of 22% during the fiscal has propelled HCL’s revenue past the R25,000-crore milestone. The renewal market is strong and we have a win rate of above 50% in our momentum markets,” HCL Technologies president and CEO Anant Gupta said.
Hiring, hikes & attrition
The hiring in the Indian IT-services industry has shown early signs of a steady pickup during the first quarter of the current fiscal compared with the sluggish pace in the previous fiscal. The demand for experienced professionals is growing as hiring pattern of the three-month period between April and June of TCS and Infosys reveal a sharp rise in the number of employees leaving these IT majors, indicating a growing number of jobs available in the market.
Typically, this is also a time when a large number of employees leave for higher studies. Another factor that leads to the huge movement of IT professionals in the first quarter of the fiscal is the salary increments announced by the companies. It is a period when employees look for greener pastures.
Infosys added 10,138 gross employees in Q1, of which 3,008 were lateral additions. The net intake number for the quarter stood at 575. For Infosys, the attrition level went up to 16.9% from 16.3% sequentially, and was higher than last year’s level of 14.9%. “We are expecting the attrition rate to come down marginally over the next 2-3 quarters,” said SD Shibulal, CEO and MD, Infosys. The Bangalore-based IT firm indicated that hiring in the coming quarters will be based on business needs and is currently more focused towards improving the utilisation level. The utilisation level, however, has gone up to 74% on a last twelve month (LTM) basis, an
increase of 290 basis points.
TCS continued to hire during the quarter with a gross addition of 10,611 people. However, it added only 1,390 people on a net basis, taking its total headcount to 277,586 employees at the end of the June quarter. The management indicated that the company is comfortable in scaling up, excluding trainee utilisation, in the range of 84-85%.
For TCS, attrition rate on a LTM basis dropped sequentially to 10.52% including BPO. The attrition rate in IT was at 9.55%, while BPO attrition was higher at 15.77%. “We have been able to push our utilisation rates further. The on-boarding of current year’s engineering graduate trainees will start from this quarter onwards,” said Ajoy Mukherjee, executive vice president and global head, HR, TCS. For FY14, TCS maintained its gross hiring target of 45,000 employees and has already given campus offers to about 25,000 people, the first batch of which is expected to join during the current September quarter.
Wipro, at the end of the June quarter, total head count stood at 1,47,281. During the quarter, the company had a net addition of 1,469 people. The IT firm’s attrition rate stood at 13.2%, a fall of 0.5% sequentially.
At the end of the June quarter, HCL Technologies had a total headcount of 85,505 as against 84,319 a year ago. During the quarter, HCL Tech reduced the number of employees in software services by 405. The Delhi-headquartered IT firm has topped its peers in terms of employee utilisation during the period. The level of attrition stood at 14.9% which was higher than 14%, a year ago. HCL Tech said during the results that it will increase wages by 3% and 8% for its onsite and offshore employees respectively in the coming months.