Where are the signs of recovery in Indian IT industry?
Mumbai/Bengaluru: A less-than bullish commentary by managements of Infosys Ltd, Wipro Ltd and HCL Technologies Ltd, and fewer analyst recommendations for buying their shares, have made many wonder if the current financial year will be better for the industry than the last one.
In January, executives at India’s largest information technology (IT) outsourcing companies had exuded optimism that 2018-19 was going to be a better year. Investors bought into the story as shares of the four largest IT companies outperformed the Sensex until 12 April.
Since the start of the year until 12 April, a day before Infosys declared earnings, TCS shares gained 16.2%, Infosys 11.8% and HCL 13.5%, while Wipro lost 8.5%. During this time, BSE Sensex hardly posted any return, gaining 0.13%.
However, two months into the current financial year, it appears many of these companies are grappling with unique challenges and that all of them will struggle to improve the growth reported in the last two years.
India’s largest IT services firm Tata Consultancy Services Ltd has bucked this trend so far. The Mumbai-based company has been an outlier—its management reaffirmed that it should clock double-digit growth in the current year, leading to more brokerages putting a buy recommendation on the shares after it declared earnings on 19 April.
But fewer analysts are now bullish on Infosys, Wipro and HCL Technologies (See adjoining table) after the companies declared earnings than at the start of the year.
“Save for TCS, the question to be asked to IT companies is, where is the recovery,” said the former CEO of one the largest IT firms. “Certainly, the growth outlook is not much better than last year. Even the management commentary is not cheerful as it sounded in January. So, what has really changed in the last four months?”
Infosys reported a 7.2% dollar revenue growth at 24.3% operating margin in the year ended March 2018. For the current year, the company expects to grow its dollar revenue between 7% and 9%, but at a lower operating margins band of between 22% and 24%, prompting some analysts to change their bullish outlook.
Ditto for Wipro and HCL.
Two client-related bankruptcies and the company’s planned restructuring in the Middle East and India is taking longer than chief executive officer Abidali Neemuchwala had anticipated dashed any hopes that Wipro will turn the corner soon.
Wipro does not give a full-year revenue guidance but expects quarterly revenue to be between a decline of 2% and growth of 0.2% in constant currency terms in the April-June period from the preceding quarter.
HCL Technologies, which reported a 12.4% growth last year, expects to grow its dollar revenue between 10.5% and 12.5% in the current fiscal. However, management expects more than half of this incremental growth to come from acquisitions and because of business brought from the company’s many intellectual property (IP) partnerships.
Worryingly for investors, all these companies are not struggling for revenue growth alone as a few analysts like Keith Bachman of BMO Capital Markets have expressed scepticism on the profitability outlook for them.