Unlike large information technology (IT) firms, which boosted revenue smartly by at least 5% in dollar terms during the three months ended 31 December, midsize firms reported flat revenue.
Hexaware Technologies Ltd, a midsize IT services provider with annual revenue of $215 million (Rs989 crore), reported a 0.9% drop in revenue in dollar terms. But it seems to be in a worse position than its peers.
The firm has guided for a 7.4-11% decline in revenue for the quarter ended 31 March, and expects things to look up from the June quarter. According to an analyst, the firm has recently concluded two large projects and it seems like it’s taking time before that gap gets filled. Besides, some projects are getting delayed, all of which is leading to a decline in revenue in the March quarter.
The problem is that the delay in revenue accrual will just make things worse on the profit front. Last quarter, even though revenue was flat, billing rates were more or less stable and employee utilization was maintained, operating margin fell by 580 basis points. This was because the company increased its employee base in anticipation of more work. With some projects getting delayed, higher employee costs are eating into margins.
Graphic: Yogesh Kumar / Mint
Things will get much worse in the March quarter owing to the sharp decline in revenue. But margin worries are likely to persist even after that, as the company will reverse the salary cuts of last year and is also expected to give a pay hike over and above that. With demand for IT professionals rising considerably in the past few months, there’s little choice for midsize firms such as Hexaware but to increase salaries. But since revenue will increase with a considerable lag compared with large-sized firms, this could cause a severe dent in margins. As pointed out in this column earlier this month, midsize firms have also lost out to their larger peers owing to the process of vendor consolidation since last year.
All this seems to have led to considerable disillusionment among Hexaware’s investors—the firm’s shares now trade at only about five times earnings after adjusting for the cash on its books.
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