The turnaround of the Indian information technology (IT) industry in the current fiscal year has been quite spectacular. Exports of the Indian IT-BPO sector had grown by a mere 5.5% in fiscal 2009-10, and about a year ago industry body Nasscom had estimated revenue would grow by 13-15% in FY11. It now looks like the industry’s growth may be much higher—last quarter, top-tier firms, barring Wipro Ltd, grew revenue by about?30%.
It’s been apparent for some time now that Nasscom’s growth estimate would be easily surpassed. But after last quarter’s results and the ensuing commentary from IT firms, it appears that the strong growth should sustain in the next fiscal year as well. Revenue growth was healthy for most firms. But more importantly, employee hiring was strong, indicating clearly that IT firms expect strong demand for their services even in coming quarters. In fact, soon after its results announcement, Tata Consultancy Services Ltd announced that it plans to hire 37,000 employees from campuses in the next fiscal year, more than 50% higher than the campus hires it has made this year.
According to the top firms in the sector, outsourcing clients have either maintained their IT budgets for 2011 at last year’s levels or have increased it a notch, while at the same time growing the proportion of offshore work. Pricing continues to be stable and the overall mood in the industry is quite confident. And while there were concerns about the economic situation in Europe, most firms reported strong growth in the region last quarter.
This is not to say that there are no weak spots at all. Firms with a high exposure to the telecom industry are struggling, with the performance of global telcos continuing to languish. Some small- and mid-sized companies, too, have reported lackluster results, either because of a large exposure to a few clients or to a few industries. Mastek Ltd has reported losses for the second quarter in succession owing to loss of business from a large client.
These firms are also struggling to offset wage inflation and maintain margins. Some of them have had to resort to giving employees a second round of salary increases to contain attrition. It’s not that the larger firms aren’t facing wage pressures. But thanks to their large size, these additional costs are being absorbed and margins have been maintained.
So while the revenue growth story is intact, this is not necessarily translating into strong earnings growth. The industry is in a sweet spot as far as demand is concerned, but the picture is clearly not perfect.
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