Bangalore: December quarter earnings and forecasts provided by two of the country’s largest software firms—Tata Consultancy Services Ltd (TCS) and Infosys Ltd, hint at a potential recovery for India’s $70 billion information technology (IT) services sector, as these companies trade high profit margins to gain bigger contracts and customers in the US and Europe push to cut costs.
While Infosys chief executive S.D. Shibulal gave positive commentary for the first time since June last year, India’s largest software services provider TCS on Monday said it will beat Nasscom’s upper end of the revenue forecast for the year to 31 March. Nasscom has forecast 11-14% growth for the sector during year ending 31 March.
“We will beat Nasscom’s growth forecast this year and 2013-14 will be a better year than 2011-12 as we see the momentum is good,” N. Chandrasekaran, chief executive of TCS said on Monday. “Deals are coming from across markets such as retail, financial services and transportation.”
Analysts at brokerage firms CLSA and JPMorgan Chase said 2013 and the financial year ending 31 March 2014 will be better than the past 18 months, unless a Lehman-like crisis happens or the US fiscal cliff worries come true.
“While revenue growth trajectory was soft through 2012, it has flat-lined and an inflexion point is likely in 2013, posing upside risks to street revenue forecasts for next nine-12 months. 2013 is likely to be a better year for revenue growth than 2012,” said CLSA analysts Nimish Joshi and Arati Mishra in their note on 14 January. They also upgraded Indian IT sector after 18 months of “underweight” rating to “overweight”.
On its part, TCS had always maintained over past few quarters that it will beat the Nasscom growth projection. Rival Infosys however, kept providing a gloomy outlook for the sector and even stopped giving quarterly revenue forecasts from June last year. The October-to-December period changed all that when Infosys beat expectations and grew its net profit by 12.1% to Rs.2,369 crore for the period.
Infosys grew its December quarter revenue by 4.2% from the preceding three months, double the rate at which analysts had estimated.
Outsourcing experts said the biggest test for TCS and Infosys will be to increase their share of IT spend by top customers.
“The differentiators will be whether Infy or TCS can add BPO (business process outsourcing) deals, vertical process and discrete analytics engagements to boost their market share and to broaden their footholds in major clients,” said Phil Fersht, founder of outsourcing advisory firm HfS Research. “We believe Infy started to turn the corner middle of last year with an increased focus on process and higher end IT work and now the results are beginning to bear fruit. Moreover, some pull-through business from its Lodestone acquisition is starting to materialize.”
According to CLSA, after several quarters of slow growth, the sector seems to have hit an inflection point, from where it could only rise.
“A downcycle through the last 18 months saw revenue growth plummet below the trendline of mid-teens growth and an above-trend growth is likely this year,” CLSA analysts said. “Inflexion point in dollar-revenue growth trajectory amid minor improvement in discretionary spends point towards a better IT spending environment in 2013 which should drive earnings upgrades aiding stock price performance,” they said.
Analysts at JPMorgan India said 2013 is going to be much better as the December quarter marked the bottom in terms of growth rates for these companies.
“A discretionary spending comeback, legacy deals opening up in 2013, and the stability of client budgets could be triggers,” JPMorgan analysts Viju K. George and Amit Sharma said in their 14 December report on the sector.
CLSA also upgraded TCS to “outperform” on Monday after the company announced its earnings.
“With some pick-up in discretionary spends (seen in Infosys’s results as well), TCS could potentially throw up some positive surprises on revenues in the coming quarters,” CLSA said.
This growth though will come at a price—Infosys could see its profit margin touch the historic low of around 25%, and TCS too is expected to settle in 24-25% margin, according to experts.
“We believe Infosys could exit calendar 2013 with margin of around 25%,” said a brokerage analyst with a multinational bank requesting anonymity in a phone interview on Monday from Hong Kong.
Indeed, Infosys’s December quarter profit margins are already 5.2 percentage points lower at 28.5% than the same period last year.
“Infosys’s recent flexibility on pricing and deal structures have been led by a desire to protect turf in a slowing market with enhanced competition,” analysts at Kotak Institutional Equities Research said after Infosys earnings on Friday. “This dogfight for share could continue unless discretionary IT spending picks up,” they said.
Later this week, Wipro Ltd and HCL Technologies Ltd will announce their October-to-December quarter earnings.
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