Information technology: Gloom envelops the IT services sector
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Top Indian information technology (IT) services companies continued to disappoint on growth, and the outlook given by some of them suggests there are no signs of a recovery in sight. Analysts at Nomura Research point out that there is a clear mismatch between investors’ hopes of a recovery in the US market, and in the banking, financial services and insurance (BFSI) vertical, in particular.
For the top three India-listed companies in the sector—Tata Consultancy Services Ltd (TCS), Infosys Ltd and Wipro Ltd—year-on-year growth in the US region hit a four-year low in the March quarter. Revenue from the BFSI segment grew just 0.4% sequentially for these companies, the slowest in five years. Some analysts and companies had been hailing 2017-18 as the year for a recovery in spending from the BFSI segment, on the back of a pick-up in the US economy and an increase in interest rates. But the recovery isn’t turning out to be as strong as expected, and in any case isn’t resulting in new project wins.
Besides, nearly all top companies said that the retail vertical is facing severe challenges, affecting growth in the segment. On a year-on-year basis, revenue from this segment was almost flat. The healthcare segment has suffered as well, owing to uncertainty about regulatory changes by the Donald Trump administration.
What’s more, margins are gradually declining, and pricing has come under pressure as well, especially in the legacy side of the business. “We believe that the drag from legacy business continues at a pace higher than new digital business”, analysts at Kotak Institutional Equities said in a note to clients.
Profit margins fell between 30 and 70 basis points for the top three firms, and things may get worse in the June quarter, thanks to the appreciating rupee. One basis point is one-hundredth of a percentage point. As far as the outlook for the future goes, Infosys’s guidance of growth between 6.5% and 8.5% was below expectations, and reflects the fact that growth is increasingly difficult to come by.