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Rupee to the rescue

The top-tier players in the $76 billion Indian IT sector have confirmed what the market has been guessing for a while now?the final quarter this fiscal is going to be a real tough one.

The top-tier players in the $76 billion Indian IT sector have confirmed what the market has been guessing for a while now?the final quarter this fiscal is going to be a real tough one. The weak rupee helped them overcome most of these difficulties and post good numbers in the third quarter, but that could be a short term happiness. Reported amidst negativity in the global economy, the December quarter results of these IT giants have shown signs of slowdown in IT spend. Volume growths for the quarter have been below expectations, while management commentary has indicated budget cuts from clients.

Research firm Gartner had concurred with the outlook, stating recently that global spending on IT will rise at the slowest pace in three years in 2012. Of all the alarm bells going off, none resounded like those from Infosys, which recast its annual forecast, bringing it down to 16.4%, from 17.1-19.1% projected in the previous quarter. Tata Consultancy Services (TCS) also indicated uncertainty in the coming months. According to a research note from Kotak Securities, TCS has surveyed 120 clients (of 1,000 total clients), out of which 96 clients have frozen their budgets for calendar year 2012. Two third of its clients will see flat to higher budgets, while the balance were expected to see a fall YoY.

SD Shibulal, CEO & MD, Infosys, said while announcing the firm?s quarterly performance: ?The global economy, driven by slower growth in developed markets coupled with the European crisis, could impact the growth of the industry.? He added that the company was seeing a ‘marginal downgrade in velocity of business, stressing that larger deals were taking more time to close, and confidence among clients was visibly lacking.

Although the company?s performance for the December quarter, traditionally a weak quarter for IT, beat market forecasts with a YoY profit growth of 33%, its bearish outlook for the next three months dragged its share price down by 8% on the day of the announcement. The second largest IT major?s sequential volume growth was at 3.1%, below earlier projections of 4.2-6.4%.

However, for the first time in well over a year, TCS failed to outperform Infosys in volume growth. The country?s largest IT exporter increased volumes by 3.2%, lower than market projections, as well as the growth it had seen a year ago. Sanjeev Hota, senior analyst with brokerage firm Sharekhan said, ?For TCS, compared to 8% volume growth in the year ago period, this is a fairly big dip. We were expecting it to be in the range of 4-4.4%. However, the third quarter is typically slow for IT firms, and neither TCS nor Infosys have been an exception. Their volume growth for the quarter has been at par, and both have been below expectation.?

Wipro, meanwhile, posted a net income growth of 10% year-on-year to R1,456 crore in the third quarter from R1319 crore, aided by a depreciating rupee. Chairman Azim Premji also struck a cautious note on the uncertainty in the overall macroeconomic sentiment. HCL, on the other hand, beat forecasts of 4%, adding 4.9% to its volumes sequentially. Mid tier IT firm MindTree, which beat margin forecast, shed 0.8% in volumes.

On the bright side, though, the rupee?s historic fall against the dollar in the December quarter gave a much needed power boost. The firms delivered strong operating margins, some outpacing expectations. Profits were also in line or better than forecasts.

TCS

For the third quarter ended December, TCS posted a 18.26% jump in consolidated net profit to R2,802.77 crore, up from R2,301 crore during the same period last year. The IT major?s total income stood at R13,204 crore during the quarter, as against R9,663 crore, a year ago, registering a growth of 37%.

TCS reported a sequential volume growth of 3.2% in Q3, while during the September quarter it had reported a sequential growth of 6.25%. Analysts pointed out that compared to 8% volume growth in the year ago period, this is a ?fairly big dip.? However, some are of the opinion that the dip in volume growth was largely due to the seasonal impact during the quarter.

Operating profits during the quarter stood at R3,854 crore, up 22.6% sequentially and 42.4% YoY. N Chandrasekaran, CEO and MD, TCS noted that, growth has been broad-based with all markets and all industries contributing substantially. EBIDTA margins were about 190bps higher on a QoQ basis, on the back of the rupee depreciation. Analysts noted that

improvement in EBIT margins was along expected lines. The high employee intake and the consequent fall in utilisation rates set off some of the gains from currency depreciation. ?More importantly, the growth was broad based with most verticals, geographies and services growing QoQ. Pricing was higher QoQ due to mix change. We view this as a positive,? said Kotak Securities.

The company said that all sectors posted strong growth, growing at more than double digits sequentially except telecom. Revenues from energy & utilities vertical fell after growing by 22% QoQ in 2Q. The telecom vertical witnessed de-growth and has also been pretty volatile. In terms of service lines, consulting and enterprise solutions posted high growth. The IT major kept a cautious approach about pricing and sees low probability of like-to-like improvement, noted Kotak.

Among mature markets, Europe led the growth story with 18.1% growth sequentially, followed by the US (13.3%) and UK (9.5%). In the growth markets, Latin America showed significant momentum with 18.6% growth sequentially followed by India (14.8%) and Asia-Pacific (15.7%).

During the quarter, TCS added 40 new clients, including two with deals worth over $100 million. It won 10 large deals (10 in 2Q) during the quarter. On the macro front, the company also conceded that, the uncertainty is likely to persist. Client budgets have been largely finalised with mixed trends. For FY13, TCS does not see any cause of undue concern. The IT firm has not seen any project cancellations.

Infosys

Infosys raced past market forecasts with a 33% increase in net profit for the third quarter, on the back of a much weakened Indian rupee. The company?s net profit during the quarter rose to R2,372 crore from R1,780 crore a year earlier. Earnings per share for the quarter stood at R41.51 compared to R31.14, up 33% a year ago.

Revenues of the firm grew 31% to reach R9,298 crore from R7,106 crore. However, SD Shibulal, CEO, Infosys, warned that the slower growth in developed western markets and the debt crisis in Europe, could impact the expansion of India?s outsourcing technology industry. India?s second largest IT exporter, cut its dollar revenue forecast for the financial year to 16.4%, keeping in mind the unpredictable global economy. In October, Infosys had projected a revenue growth of 17.1-19.1% for the fiscal. This is the second time in last six months that the firm has cut its forecast in dollar terms.

During the quarter, Infosys reported a 3.1% volume growth, lower than its implied volume growth guidance of 4.2-6.4%. However, dollar revenue growth of 3.4% and EBIT margin expansion of 300 basis points were ahead of Street expectations. ?11% QoQ depreciation of the INR was a key tailwind for margins, which had a 440bp positive impact. 140bp increase in operating costs limited the EBIT margin expansion to 300bp QoQ,? said a note from Motilal Oswal.

Geography wise, Europe, which grew 14% QoQ, was the biggest contributor during the quarter accounting for 84% of the incremental revenue. The IT major added 14 new clients from the continent during the quarter, of which two of them in the $500 million bracket in the manufacturing and financial services space.

?Existing client account ramp up across sectors like manufacturing, financial services, retail, CPG, and new client additions led to the overall spike during the quarter,? said BG Srinivas, head of Europe and Manufacturing. Currently Infosys has 125 clients in Europe, with 50% of its revenue coming from the UK. From a vertical perspective, manufacturing grew 4.8% QoQ and accounted for 26% of incremental revenues; while ADM and Products drove the revenues among horizontals. ?Key disappointments were telecom, which declined 2.5% QoQ and revenues from top customer, which was down 8% QoQ,? said Motilal Oswal. Angel Broking said that the company is seeing IT spending coming in the manufacturing industry from clients in terms of work related to harmonising processes and transformation to gain cost efficiency and simplicity.

Service wise, revenue from business operations (contributed 64.3% to revenue) grew by 3.4% qoq, majorly led by 9.5% and 8.8% qoq growth in PES and IMS, respectively. Revenue from application development and application maintenance posted 3.4% and 4.4% growth, respectively. Revenue from consulting and system integration (contributed 30.6% to revenue) grew by 1.4% qoq. Revenue from products, platforms and solutions (contributed 5.1% to revenue), which had declined by 0.5% qoq in 2Q FY12, increased by 17.2% qoq due to an 18.2% qoq increase in revenue from products.

During the quarter, Infosys closed five large deals of which two were in the $500 million range. It had a net addition of 18 new clients. The IT bellwether is currently undergoing management transformation, with founder chairman NR Narayana Murthy having exited the company last year. Some of the top executives like TV Mohandas Pai too have left the firm.

Wipro

Wipro barely met market expectations with net income growing 10% year-on-year to R1,456 crore in the third quarter from R1319 crore, aided by a depreciating rupee. The profits showed a growth of 12% sequentially. The company?s IT services revenues were R7,608 crore for the quarter, reflecting an increase of 28% over revenue of R5,949 crore in the corresponding quarter in the previous year. The IT services? earnings before interest and tax for the quarter were R1,583 crore, an increase of 20% year-on-year.

Wipro, which has flagged concerns on the overall uncertain macroenconomic environment, expects its IT services revenues in the fourth quarter to be in the range of $1,520 million to $1,550 million, a sequential growth of 1% to 3%. ?We continue to execute on our strategy and propel the business towards a higher growth trajectory. The overall macroeconomic sentiments continue to be uncertain and we are monitoring it closely,? Azim Premji, chairman, Wipro said during the results announcement.

TK Kurien, CEO of Wipro?s IT Business said that the company has seen positive feedback from customers and employees on its restructuring approach. Wipro had witnessed a management shake-up last February when it decided to discontinue the joint-CEO approach for a simpler structure and appointed Kurien to the post of CEO.

?We saw broad based growth with 5 of the 6 verticals growing upwards of 4% in constant currency. Revenues in constant currency exceeded the guidance range,? said Kurien. According to Suresh Senapaty, executive director & chief financial officer of Wipro, the company has been able to improve operating margins through improved revenue productivity and currency benefits. The firm, which has six customers each contributing more than $100 million revenue, said that it added 39 new customers of various sizes during the quarter.

Revenue from the Americas, which contributed 52.5% to the firm?s IT services revenues, showed marginal growth over the second quarter while Europe and other geographies remained flat. As enterprises look to gain operational flexibility in the uncertain environment, the firm said it continues to see growth in the cloud enablement business, outcome-based and service-based pricing models In India, the government vertical continued to build traction because of the large planned investments in the e-governance space, it said.

HCL Technologies

IT services firm HCL Technologies posted a 43.3% jump in its net profit at R572.7 crore during the October-December quarter, backed by broad-based growth across geographies, and industry verticals. The country?s fourth largest software exporter?s revenues were up 34.9% at R5,245.2 crore, against R3,888.4 crore, a year ago.

Analysts noted that highlights of the result were the 4.9% qoq overall volume growth and 5.7% qoq onsite volume growth in core software services. EBITDA and EBIT margins of the company expanded by 141bp and 156bp qoq to 18.5% and 15.8%, respectively, because of 260bp positive impact on account of INR depreciation during the quarter, said an Angel Broking note.

HCL?s operating results were marginally above expectations. ?The 4.9% (5.1% in 1Q) volume growth in software services was above expectations. HCLT has achieved consistency in revenues, especially in software services, over the past few quarters. The 140bps improvement in margins was slightly higher than estimates,? said Kotak Securities.

Management has indicated continuing headwinds for the industry in the form of an uncertain macro which is affecting decision making. On the other hand, it expects to continue to participate and win large deals in the next few quarters as the churn ratio in re-bidding of large IT outsourcing deals is very high. The IT firm won 18 multi-year, multi-million dollar deals totalling a contract value of more than $1 billion and expects business from two of its top 10 clients to be more than $100 million a year.

?A lot of churn is happening in the Global 500 customer base. The contracts up for renewal are spread across 249 customers, with the likelihood that as many as a third of those might go to new vendors,? said Vineet Nayar, vice-chairman and CEO, HCL Technologies. The IT company added three clients of $100 million each in the quarter.

Sequentially, the net income rose 15.3% from R496.7 crore, while revenues grew 12.8% from R4,651 crore in the trailing quarter. Within geographies, US reported a 7.3% growth in CC terms. Europe pitched in with a 6.3% growth. The growth in Europe comes on the back of high growth rates in the past five quarters, indicating improvement in demand scenario and increased spending by clients in that region.

Hiring and attrition

For TCS, the hiring spree continued, with a gross addition of 18,907 employees which included 10,341 trainees and 6,763 laterals in India as well as 1,803 employees in international locations. The net addition during the quarter was 11,981 employees. At the end of Q3, the total employee strength stood at 226,751.

TCS indicated that it will likely add close to 65,000 employees on a gross basis versus its earlier target of 60,000. It said currently its non Indian nationals formed 6.6% of the total employee base from 103 nationalities and 31% were women employees. On a 12 month trailing basis, attrition rates were down to 12.8% in Q3, of which, attrition in IT services was 11.7 %, and BPO at 22.6%.

Infosys also saw a softening of the high attrition levels it had been facing over the past few quarters. On a 12 month basis, it reported a 15.4% attrition rate compared to 17.5% a year ago though it remained flat sequentially. The company added 9,655 employees during the quarter, of which the net addition was 3,266 employees and lateral hires stood at 3,459. Infosys? total staff strength as of December stood at 1,45,088 employees.

Infosys is expanding its presence in the US which accounted for more than half of the company?s 500 hires outside India in Q3. In the fourth quarter, the company has a target of hiring around 1,000 employees outside the country, of which 500 will be in the US. Currently, Infosys has 15,000 employees in the US, of which 2,000 are locals. The company plans to increase its hiring target each quarter in the US so that locals constitute 50% of the workforce in the next few years. ?The company also plans to start campus hiring in the US next year, said Nandita Gurjar,

senior VP and group head (HR), Infosys.

During the quarter, HCL Tech added 7,804 gross employees, of which 6,017 were lateral additions. The company added 2,556 net employees, taking its total headcount to 83,076. On the other hand, Wipro?s voluntary attrition rate (quarterly anualised) dropped to 14.2%, the lowest in eight quarters and it reflects a drop of 9% in the last two quarters. The rate was 18.5% in the second quarter which ended in September 2011. The company, whose IT services segment has a total strength of 136,734 employees, added 5,004 people during the quarter. In spite of the global environment, the company sees a robust outlook in hiring.

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First published on: 23-01-2012 at 02:02 IST
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