Information Technology: Firms cut costs to offset weak revenues
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Information technology (IT) services firms’ struggles with growth seem to be getting worse. India’s top companies reported muted growth of between 0.2% and 2.2% in constant currency terms for the September quarter. What’s more, important sectors such as banking and financial services and retail are dragging down growth.
“Contribution from acquisition for companies such as Wipro (Ltd), HCL Technologies (Ltd) and Tech Mahindra (Ltd) camouflaged the magnitude of slowdown. On organic, constant currency basis, tier-I IT companies will end up with 5-7% growth for FY18 (except Wipro will be lower at about 2%)”, analysts at Kotak Institutional Equities said in a note to clients.
On the flip side, they cut costs by a sizeable margin, which helped them beat analysts’ earnings estimates. At the start of the calendar year, analysts were hoping this year will be different, with growth expected to revive in banking, financial services and insurance (BFSI) segment. It appears some overseas firms such as Accenture Plc. are gaining market share in key industries such as banking and financial services and retail. Accenture’s growth in these segments was higher than the company’s average growth rate in the latest quarter.
This puts the spotlight again on its relatively higher investments in digital services vis-a-vis Indian firms, which get a far higher proportion of revenue from traditional services. What makes matters worse for Indian IT companies is that pricing pressure has increased in traditional services.
The saving grace is that firms tightened their belts and reported margins that were higher than estimates. “In their bid to defend margins and improve efficiency, companies have taken up (employee) utilization by up to 400 and 600 bps (basis points) on q-o-q (quarter-on-quarter) and y-o-y (year-on-year) basis. The current utilization level of most Indian IT companies is close to peak”, Kotak’s analysts said in the note. As such, levers to improve margins further may be limited.