For the past two years, there has been a dichotomy in the performance of India’s largest information technology (IT) services companies. Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd (HCL Tech) have grown revenue at a healthy clip while Infosys Ltd and Wipro Ltd have struggled to keep pace. And on a cumulative basis, growth rates had been slipping.
The main takeaways from the December quarter results are that Infosys has bounced back strongly, Wipro continues to struggle and that industry growth rates have turned the corner.
Infosys reported a 4.2% sequential growth in organic revenue (excluding revenue from the acquisition of Lodestone Holding AG) to $1.87 billion, which was the highest rate of growth among all large IT companies. What’s more, its guidance for the March quarter indicates that year-on-year (y-o-y) growth rates are progressively improving—from 2.9% and 3.7% in the September and December quarters, to 8.7% in the March 2013 quarter.
Wipro, on the other hand, reported growth of 2.4% in revenue to $1.58 billion, the lowest in the peer group, and its March quarter revenue guidance (at the mid-point) implies a y-o-y growth rate of only 4.5%, which is marginally lower than the growth the company has managed in the previous two quarters.
Wipro was also the only large-sized company to report a drop in volumes (1%), which the company explained was the result of an increase in employee productivity in fixed-price projects. Such projects now account for as much as 46% of the company’s total revenue, causing some analysts to conclude that it no longer makes sense to look at volumes, which is measured by the number of man hours billed by a company.
After all, profitability of fixed-priced projects improves with lower man hours. Even TCS and Infosys reported anaemic volume growth rates of 1.25% and 1.5%, respectively, and a strong improvement in employee revenue productivity. Having said that, the fact remains that Wipro continues to underperform and still has to catch up. TCS and HCL Tech’s reported revenues were marginally ahead of analysts’ consensus estimates.
On a cumulative basis, the four companies reported a sequential revenue growth of 3.38% to $7.55 billion, the highest in five quarters. Similarly, y-o-y growth rates rose, after declining for at least five quarters. Revenue grew by 9.14% last quarter, compared with a growth of 8.28% in the September quarter. This trend should continue. TCS has said that the March quarter should be better than the December quarter, while Infosys’s guidance also suggests acceleration in growth. Needless to say, this has come as quite a positive surprise, since both the December and March quarters have traditionally been soft quarters for IT services companies, owing to a higher number of non-working days.
An analyst with a domestic institutional broker says that the current momentum means that IT companies will finish the year with a healthy quarterly revenue run rate, and this will even help growth in the next financial year.
TCS has gone so far as to say that the growth rate in 2013 is likely to be better than in 2012. Likewise, the commentary of most companies has been much more positive compared with earlier quarters, with most companies talking of having signed large deals worth hundreds of millions of dollars. It’s little wonder investors have been excited about the turn around in the sector. Since the beginning of the results season, National Stock Exchange’s CNX IT index has risen by 12%, compared with a 1.6% increase in the Nifty. In the six-month period before that, IT stocks had underperformed the market by around 12%.
In the midst of all this, SAP AG reported preliminary results, and its software and software-related revenues were below street estimates. Analysts at Nomura Research noted, “Both Infosys and TCS reported strong growth in enterprise solutions, consulting and system integration service, raising hopes among investors of a recovery in discretionary spend. However, we believe SAP’s results should temper some of these hopes.”
All told, while there are signs of a recovery, investors will do well to exercise some caution in valuing Indian IT stocks. Additionally, as Wipro’s results show, it doesn’t make sense to assume that all companies will benefit from the expected recovery in the IT services industry.