IT hits a speed breaker

The traditionally strong September quarter saw an unusual and unexpected slowdown in what seems like winter setting in a bit too early for the country’s top IT services companies.

By Anand J

The December quarter is usually the weakest for the companies, with long Christmas holidays and furloughs affecting quarterly performance.

Even the leader, Tata Consultancy Services (TCS), reported numbers below market expectations, quite unusual for the Tata Group company which has been going strong for the past many quarters. In fact, TCS said FY15 might not come out much better than FY14, as it had anticipated earlier.

HCL Technologies, which has consistently bettered analyst expectations, disappointed this time, with stocks taking a beating after the results. The company saw a drop in employee utilisation rate, a metric where it consistently outperformed other big players. After showing signs of an upswing, Wipro saw a sequential decline in net profit in rupee terms for the September quarter, disappointing the analysts.

Bangalore based-Infosys though surprised the markets with a better performance and surprisingly high margins despite wage hikes. This was the company’s first quarter under Vishal Sikka, its first non-founder CEO.

The better performance of Infosys, India’s second-largest IT services exporter, helped it to narrow the gulf with TCS, the biggest, in certain parameters like organic growth and operating profit margins (OPM) after lagging behind the bigger rival for many quarters. There are strong indications of Infosys achieving its revenue guidance of 7-9% for FY15.

TCS has been consistently maintaining a definite lead over Infosys in all key metrics—revenue, profit, OPM and attrition—and there were no signs of any closure of the gap between the two in the past many quarters. However, at the end of second quarter of FY15 the revenue growth reported by Infosys was 3.1% while it stood at 3.6% for TCS, without taking into account the inorganic revenue from the buyout of its stake in its venture with Mitsubishi. In the same vein, the gap between the two in terms of operating profit margins (OPMs) closed down to just 0.7% when compared to 1.2% in the preceding quarter.

TCS

TCS reported a 4.6% sequential increase in net income for the quarter at R5,288.30 crore on the back of good performances in core markets like the US, UK and Europe. The Mumbai-based IT major reported total revenues of R23,816.50 crore during the same period, registering 7.7% sequential growth. The growth though was a result of integrating the revenue numbers of its joint venture entity in Japan with Mitsubishi and IT Frontier Corporation, providing it with additional growth in verticals like manufacturing and hi-tech.

On a year-on-year basis, the company’s revenues were up 13.5% and net income was up 13.2%. Revenues from the Japan joint venture stood at $103 million or R633.24 crore, during the quarter. The operating margin rose 55 bps to 26.8% during the quarter on the back of a 70-bps gain from depreciation and a 10-bps gain from currency fluctuations. However, the company lost close to 50 bps on operating margin on the account of its newly merged entity in Japan.

“Driven by strong volume and utilisation rates, this has been a quarter of steady, consistent performance. We are short of revenues by about $20-25 million compared to our internal estimates, due to continuing softness in the insurance space and a slower ramp-up in the retail vertical and in Latin America,” said TCS managing director and CEO N Chandrasekaran. He added that the company is looking for acquisitions to build scale in the healthcare vertical and looking for a much deeper penetration in Europe apart from trying to keep pace with new technologies.

During the quarter, TCS added four clients with a market value of over $50 million and nine companies with over $20-million market capitalisation. The IT major also bagged eight large deals— two in Banking and financial services (BFS), two in manufacturing and one each in retail, energy, healthcare and utility businesses.

The company registered double-digit growth in the Indian market—the second consecutive quarter of growth after several quarters of negative growth—on the back of higher corporate spending and central government’s IT initiatives, where the company has been roped in to provide solutions.

Infosys

Infosys reported a 6% sequential growth in net profit at $511 million on higher volumes and the highest ever employee utilisation even as it announced a 1:1 bonus issue. The company also offered 100% variable pay for its 1.65 lakh employees, probably with a view to stem record attrition of over 20%, a move to win back the confidence of investors and employees alike.
Infosys’ consolidated net profit for the quarter grew 33.4% to $511 million from $383 million in the year-ago period, while it had reported a profit of $482 million in April-June. Revenue for the quarter was at $2.2 billion, a growth of 6.5% y-o-y from $2.06 billion and a 3.1% increase sequentially from $2.13 billion. Infosys won seven large deals totalling $600 million in the quarter, of which five were in the US. The North American region contributed 60.8% in revenue for the company, while Europe contributed 24.7%.

Infosys’ margins rose 96 bps in the quarter while revenues increased 3.1% sequentially. Volumes grew at 3% with onsite volumes continuing to show an uptick for the second straight quarter, and utilisation at an all-time high of 82.3%. “The key point is that the 50 bps margin beat is high quality,” brokerage CLSA wrote in a note. Rajiv Bansal, CFO, said that the company has been able to improve its margins during the quarter and sounded confident of sustaining OPM within a narrow band around 25%. These appear to be positive results both on revenue momentum and margin performance. Sikka appears to have begun well. The better margins came partly from rupee depreciation of 1.3% quarter-on-quarter, tight control of administrative costs and some increase in utilisation and offshoring.

Sikka promised to create a next-generation services company that would regain its position as the sector’s bellwether though he did not offer details. Barclays was, however, disappointed the management hadn’t spelt out its strategy. “Details around the changes in sales force, the new go-to-market strategy and focus on SMAC space are the key ingredients of the recovery in revenue growth, in our view,” Barclays said.

Sikka told reporters that Infosys— which lags Nasscom’s FY15 industry growth rate of 13-15%—is aspiring to achieve a 15-18% growth rate by FY17, a target set by founder chairman NR Narayana Murthy. He added the company was looking beyond “yesterday’s paradigm of efficiency, hiring and labour arbitrage” to achieve this. “We have been in the past a next-generation company and defined many dimensions of business in a service company. I believe we will get back to that level. We will focus on consistent, profitable growth. We aspire to go back to that and again become the bellwether in the Indian IT industry,” Sikka said at the earnings press conference.

He added that the firm was renewing every service line and everything it offered on the basis of innovation, automation and “bringing artificial intelligence to our offerings”. Sikka said he believed these would revolutionise “back office, maintenance services, infrastructure management services, verification services and other services that we offer on the basis of technology”.

Wipro

Wipro, India’s third-largest IT services exporter, reported a 0.9% sequential decline in net profit in rupee terms for the September quarter, impacted by wage hikes and its top clients curbing their technology spends. The net profit stood at R2,084 crore, failing to meet Street expectations.

“We are seeing a temporary cutback in discretionary expenses from certain industry segments as they adjust to structural changes. Overall, the demand environment continues to hold steady. In North America, we see discretionary spending return. In some of key accounts we are going to have headwinds till December and expect that the demand come back in the fourth quarter of the fiscal. In terms of demand there is a positive bias which is much better than last year. We expect the second half to be certainly better than the first half,” said CEO TK Kurien.

Wipro has provided a dollar revenue guidance in the range of 2-4% for the December quarter, as it expects the second half of the fiscal to deliver better results. The consolidated revenue stood at R11,684 crore, growing by 8% year-on-year and 3.9% sequentially. Except for the healthcare & life science and energy verticals, all others turned in a below-par performance with its largest pie — BFSI segment — posting a dip of 0.9%.

The IT major, whose revenue grew 1.8% sequentially in dollar terms, could only touch the lower end of its guidance for the quarter, falling way below the market expectation of a 2.5% growth. Wipro said its top 10 clients had limited their spending in the quarter due to internal management changes and promised that the situation would normalise over the next 2-3 quarters. Even the operating margins dropped from 22.8% in the June quarter to 22%, largely due to the cross currency impact and wage hikes. However, the company said it hoped to take this to a level of 23-24% over the medium term.

Sanchit Vir Gogia, chief analyst & CEO of Greyhound Research, noted, “With a sequential growth of 1.8% q-o-q, we believe that this quarter has been poor and far from industry standards. Their business continues to be a well balanced portfolio between infrastructure and application services, but BPO, product engineering and ADM continue to decline. While Wipro continues to have strong focus on cloud services, they need to increase their focus on cloud-delivered managed services. The Americas segment recorded a sequential growth of 4.2% though Europe showed a decline of 4.3%. Kurien said the European market continues to remain challenging with few of their clients cutting down on their discretionary spending.

Wipro said that as part of their strategic bets, they see a great potential in the areas of digital and open source, where they plan to make investments to build IP. Kurien said, “As a strategic initiative to build deeper technical skills, we have launched the distinguished member of technical staff programme to create a cadre of technical specialists who will work on developing IP in next generation technologies.”

HCL

India’s fourth-largest IT services exporter, HCL Technologies, posted flat net profit growth in the quarter ended September, hit by lack of momentum at its core infrastructure services business and cross-currency movement. HCL reported a net profit of $307 million for the September quarter, up a mere 0.6%, as it failed to meet Street expectations. Revenue during the period grew 1.9% to $1,433 million. However, the company also said that it had signed 15 business engagements worth over $1 billion during the quarter. The company follows the July to June fiscal.

HCL Technologies CEO Ananth Gupta said, “Going forward, our investments will continue in the three strategic markets of ITO, engineering services outsourcing and the emerging digitalisation space which will enable a continued balanced business portfolio performance for the company.”

In rupee terms, net profit grew 2.1% sequentially to R1,873 crore while revenue rose to R8,735 crore with growth of 3.7%. The OPM took a hit with a decline of 120 bps sequentially to touch 25.1%. The impact was due to wage hikes and a contraction in the utilisation rate. “HCL’s results were below estimates. Revenues disappointed with constant currency growth of 3.2%.

Ebidta margin also came in slightly below expectations,” Kotak Securities head private client group research Dipen Shah said.
In terms of geographies, Americas grew 5.7% sequentially while Europe dipped marginally, by 0.3%. The company said that in coming quarters, strong growth will continue to come from the two geographies, which account for over 80% of the company’s turnover. In terms of verticals, the retail & CPG segment recorded the highest sequential growth of 14.3%.

Human resources

TCS’ gross employee additions stood at 20,350, with net addition of 8,326 employees during the quarter, taking its total employee strength to 3,13,757 on a consolidated basis. The utilisation rate, excluding trainees, stood at 86.2% while the attrition rate increased to 12.8% during the September quarter from the previous quarter’s figures of 12.3%. The company said that it will offer 35,000 jobs for freshers at campuses in 2015-16, 10,000 more than offered in the current fiscal.

TCS also added that it is likely to overshoot its overall stated target of hiring 55,000 professionals, including lateral ones, during the ongoing 2014-15 fiscal. The hiring of more freshers may pull down the company’s high utilisation rate, which stood at 81.3%, it said.

Infosys had a net addition of 4,127 employees during the quarter, which was higher than the net hiring during the year ended March 2014. Infosys’ total headcount at the end of second quarter of FY15 stood at 1,65,411. The attrition rate at the end of second quarter of FY15 stood at 20.1% against 19.5% in the preceding quarter. For the three months ended September 30, the IT major saw exit of 10,128 employees. Employee attrition continues to rise at Infosys though the company hopes to bring it down to a manageable level soon.

UB Pravin Rao, chief operating officer, said the attrition on a month-on-month basis was trending down. “In another two quarters, we expect it to be in our comfort zone of 12-14%,” he said, adding, “We have given 12,000 promotions over the past few months and have been engaging better with employees. We have a focus on educating and reskilling them.” Ian Marriot, vice-president, Gartner, said that the attrition level at Infosys is a matter of concern and it has to absolutely come down.

Wipro reported a better numbers on the employee front with net headcount addition at 6,845 and the attrition level down marginally. The total headcount at the end of September quarter stood at 154,297 while the attrition rate was at 16.9%. The company’s HR head Saurabh Govil said the increase in headcount addition was primarily due to the increase in volume of business. Wipro’s net utilisation rate stood at 79.4%—up from 77.9% in the June quarter.

HCL added 11,631 employees on a gross basis during the September quarter, taking the total headcount to 95,522. It also gave wage hikes to the tune of 2-3% onsite and 5-7% offsite during the quarter, which had a 80 basis point impact. “There will be a further impact of about 130 bps in the next quarter as the total impact of the wage hike kicks in,” HCL Technologies CFO Anil Chanana said.

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