New Delhi: By posting first-quarter results that beat Street expectations, India’s largest software services company Tata Consultancy Services Ltd (TCS) may have assuaged some of the concerns fanned by its closest rival Infosys Ltd’s below-par performance, but larger worries persist for the information technology (IT) industry.
An indication that the sector’s prospects aren’t too bright is the drop in the value of contracts held by IT companies in the six months ended June.
According to consultancy TPI, the calendar half year’s total contract value (TCV), at $41.4 billion, was down 8% from the year earlier. In the April-June quarter, TCV rose 7% both year-on-year (y-o-y) and quarter-on-quarter to $21.4 billion.
In fact, much of the sequential and yearly growth in TCV was because of 11 big deals (worth above $1 billion), that accounted for almost one-third of the contract value during the quarter.
Analysts at TPI said it was unlikely that the industry will be able to match the previous year’s TCV, let alone improve on it.
Some $61 billion worth of deals will need to come through in the second half of the year to meet or exceed last year’s TCV, said John Keppel, partner and chief marketing officer at Information Services Group (ISG), of which TPI is a part.
“Since the industry has never seen a second half quite that large, this prospect seems somewhat remote,” Keppel said.
Moreover, an increasing number of firms are restructuring their existing contracts (such deals are up almost 40% y-o-y) against starting new IT projects (this category has seen a decline of 22%).
TPI believes that the broader market will face major headwinds in the second half of the year. Keppel said that the three months ending September tends to be a soft period for IT firms and the year-ago period will be tough to beat because of the high base effect.
“But the fourth-quarter performance should pick up as several large mega deals wait in the wings,” Keppel said.
Graphic by Paras Jain/Mint
TCS on Thursday posted a net profit of $604 million and a revenue of $2.73 billion in the three months ended June, an increase of 3.2% and 3.4%, respectively, on a sequential basis, and said it continued to see good demand from global clients.
Earlier, on the same day, Infosys posted a 10.2% decline in net profit to $416 million on a 1.1% drop in revenue to $1.75 billion, and shocked investors by slashing its fiscal 2013 revenue growth forecast to 5% from 8-10% indicated in April. The firm cited cross-currency volatility in Western markets and a pricing decline as reasons.
TCS earnings provided a degree of encouragement, but the contrasting outcomes and the conflicting outlook provided by the Mumbai-based company and its Bangalore-based peer offered little help in deciphering short-term spending trends among clients on information technology.
Sudip Apte, chief executive officer (CEO) of outsourcing advisory firm Offshore Insights, said that even though Infosys’ below-expectation performance does not reflect the overall state of the market and is more due to company-specific issues, the market conditions for the sector are tough right now.
“The economic uncertainty is tremendous and the pressure on clients’ budgets is very high,” he said.
He added that this is a testing time for the Indian IT industry, which will go through a phase of turmoil and transformation for the next 12-18 months.
“For the last 20 years, we have been seeing client-pushed growth for the industry, which has changed now,” he said. “So the company with sound business policies, core business capability in terms of products and solutions, better clients relations, right investments, etc., should be better prepared to weather?the?crisis.”
According to TPI, a lot of new projects are expected to come from the emerging economies in the future and investments in such regions will be key to the success of IT firms. Among the top four Indian IT companies, Infosys has the maximum dependence on developed markets, with almost 86.5% of its revenue coming from the US and Europe.
B.G. Srinivas, head of Europe and global head of financial services at Infosys, told analysts on a conference call that the firm was facing pressure from the financial sector, which makes up the biggest chunk of its revenue.
“When the overall budgets are under pressure, there is definitely a move to get more for less, and in that context, of course, there’s competitive pressure as well,” he said.
Even though more and more analysts are saying Infosys’ problems are not common to the industry, TPI analysts are concerned about delays in decision making and the increase in activity in restructuring of contracts. Intensifying competition is also having an impact on pricing, Keppel said.
The multiple shadows over the technology industry’s future is also weighing on stock performance. For instance, after its disappointing results, Infosys dropped 8.15% on Thursday to close at Rs 2,265.25 on BSE. Since Wednesday, one day before the result announcement, the company’s stock declined by almost 12%, while that of TCS has fallen by almost 4%.
The overall BSE-IT index has fallen by around 7.7% since Wednesday’s close, while the overall Sensex has declined by 2.2%.
For the first time, Infosys refrained from forecasting its quarterly revenue for the three months ending September. “There is a lot of volatility, quarter-on-quarter, which is impacting our ability to predict the quarter,” Infosys CEO S.D. Shibulal said.
Smaller rivals Wipro Ltd and HCL Technologies Ltd will announce their results in the last week of July, which will provide a clearer picture of what lies ahead for India’s $70 billion software services export sector.