There was a time TCS, Infosys and Wipro routinely outperformed market expectations, ran up highly impressive top and bottom line figures and leaped past forecasts with ?disgusting? consistency. Since 2008, global economic realities underwent a sea change and Indian IT?s fortunes got submerged in the process. It never really got out of the woods, though it offered glimmers of hope in 2010. There is a feeling?perpetrated by a section of the IT analysts community as well as the media?that all is over for companies like Infosys and Wipro. Every quarter, the attack on these top tier IT firms intensifies as though the companies have failed miserably and are about to go belly up. There is also this tendency to see TCS in a totally different light, even when there are clear shortcomings. This penchant of painting the sector in black and white looks like a lazy attempt. This needs some re-examination.
The attack is especially severe on Infosys?once regarded as the beacon of India?s software success story?on two accounts. Its dormant $3.7 billion cash pile and its clouded near-term visibility have become pet projects for critics. There is no denying that Infosys has underperformed in the last two years or so, with TCS consistently overpowering it in all parameters. Infosys never had to deal with a situation of having to consistently compromise on its revenue growth forecasts, but that?s a reality now and in the first quarter it had to nearly halve its guidance. Wipro, too, has offered only a muted forecast and together they paint a gloomy picture. TCS is not a part of this picture, simply because it does not give out any guidance.
Just because Infosys?s and Wipro?s numbers are below expectations, it does not necessarily mean that those of TCS have been impressive. Sure, it has done far better than its Bangalore-based rivals, but there are chinks in its armour as well. Sequentially, TCS?s revenues grew by only 3% to $2.73 billion. In the previous quarter, it had grown even slower. At the current growth rate, its revenues will grow only 12% at the end of the year. This is only par for the course. But TCS looks good because Infosys is sliding down the pole as though someone has slapped good bit of grease on it. Infosys posted a sequential revenue drop of 1.1% in the June quarter, which is only marginally better than its 1.9% drop the previous quarter. Infosys had to endure a $15 million hit, due to a client specific issue. Infosys?s woes make TCS look pretty. India?s largest IT player also had to face a 1% drop in pricing realisation in the first quarter. No wonder analysts have not found any reasons to upgrade TCS?s earnings.
It is HCL that we need to spend more time on. The Delhi-based IT major has been climbing steadily over the past few quarters, and the first quarter results have been nothing short of a revelation. It shredded analysts? estimates to pieces, recording a 27.5% growth in EBIT sequentially. Revenues grew by 4.6%, out scoring the Street?s expectations by 1-1.5%. Profit margins rose by 370 basis points. Considering the environment, these are excellent numbers. HCL shares rose 6.7% on Wednesday after the results were announced and analysts are now expected to upgrade earnings estimates.
With regard to Infosys, TCS and Wipro, the benefits from rupee depreciation were negated by cost inflation and pricing, but HCL managed to gain 145 basis points by managing costs better. HCL had only one client above the $100 million revenue mark a year ago, but now it has five. HCL?s continued focus on select verticals is something to be appreciated. Its infrastructure services vertical (one of its key focus areas) grew 9.2% sequentially. The company?s enterprise application services rose 4.8% and IT services grew 4.9%. It is the company to watch out for.
If one looks at the trends in the last 18 months, one can see how the momentum is shifting. TCS, Wipro and Infosys once formed a mighty troika, even as they carried around the Indian IT flag globally. But now some observers believe that the new triumvirate consists of TCS, Cognizant and HCL. My own belief is that it is too early to write off Infosys and Wipro. While its is true that Infosys CEO SD Shibulal may have to achieve greater near-term visibility and ensure the marathon does not become too laborious, one has to remember that the company has the wealth of experience to come out this mess. Sure, it is taking more time than expected, but Infosys?s fundamentals are far too robust to get blown by the economic winds. Similarly, Azim Premji & co are too wily to get consistently pummelled by new competition. The big boys are likely to be back on track, once their restructuring gets completed.
dj.hector@expressindia.com
