Information technology: A soft quarter for IT services firms

The revenues of top-tier firms TCS, Infosys, Wipro and HCL Technologies grew 10.1% in constant currency terms in the March quarter


The fact that growth in the key banking and financial services vertical was soft for most large companies is a worry.
The fact that growth in the key banking and financial services vertical was soft for most large companies is a worry.

Growth at India’s top software services firms was subdued in the March quarter. This isn’t entirely surprising, considering that the first quarter of the year has traditionally not been the best one for the industry. Still, the March quarter results indicate growth is slowing.

The revenues of top-tier firms Tata Consultancy Services Ltd (TCS), Infosys Ltd, Wipro Ltd and HCL Technologies Ltd grew 10.1% in constant currency terms in the March quarter, according to Nomura Financial Advisory and Securities (India) Pvt. Ltd. At the beginning of the fiscal year, growth stood at over 13%. “The 4Q results reinforce our view that revenue growth for tier-I IT players in FY17F will be slower than in FY16,” adds Nomura.

Another worry is that margins were under pressure for some firms such as TCS, Wipro and Mindtree Ltd. Analysts at Kotak Institutional Equities wrote in a note to clients, “Ebit (earnings before interest and taxes) margin (in the March quarter) disappointed and faces transient challenges of—(1) large deals that are priced assuming significant cost take-outs through automation even as these capabilities are work-in-progress and (2) incremental investments in the digital business.”

TCS’s margins fell by 54 basis points despite benefits from the depreciation in the rupee. One basis point is one-hundredth of a percentage point.

US-listed Cognizant Technology Solutions Corp., which has almost always led in terms of growth, surprisingly reported a 0.9% decline in revenue, sequentially. It has marginally cut its revenue growth guidance from 10-14% to 10-13%. The saving grace is that it expects growth to pick up sharply in the June quarter, and make up for the decline in the past quarter’s revenue.

Even so, the fact that the growth leader expects to grow 13% at best raises questions about how low growth for the rest of the industry can fall.

The fact that growth in the key banking and financial services vertical was soft for most large companies is also a worry.

All told, the March quarter results suggest a slowing of revenue and profit growth in FY17. Some companies such as Infosys may well buck the trend, thanks to the momentum they have gained through large deal wins. But with valuation multiples of 18-20 times, companies with good prospects are already pricing in decent growth.

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