The quarterly results of all the tier-I IT firms are out there and the market?s worst fears are coming true. The writing on the wall is clear?the initial two quarters of this financial year are going to be tough with the sector pinning its hopes on back-ended growth this fiscal.
While analysts knew the quarter would be challenging, but nothing had prepared them for what eventually happened. With Nasscom projecting an industry revenue growth guidance of 11-14% for FY13, analysts expected all firms to fall in line with that projection. But that was not to be. Of all the alarm bells for FY13, none resounded like those from Infosys, which posted a highly disappointing full-year revenue guidance, much below analysts expectations. Often considered as an industry benchmark, the IT major?s revenue projection of 8-10% came as a shock to the market, which was expecting the company to be at least in line with Nasscom?s predictions for the industry. The software services firm also took a drastic step to withhold wage hikes till it gained more clarity on its business; an announcement that was met with much criticism.
The country?s third-largest software services exporter Wipro, which posted a 7.7% rise in net profit for the March quarter, said it expects near-flat revenue growth in the current quarter ending June 2012. Wipro attributed the muted outlook of -1 to 1% revenue growth to slowdown in its India business and challenges in the telecom vertical. The soaps-to-software conglomerate hinted at a volatile environment, where customers are taking a cautious approach towards IT spend.
The only cause for cheer came from the country?s largest software services exporter TCS, which posted annual revenue of $10.17 billion, becoming the only Indian IT company to cross the $10-billion mark. In terms of volume growth, TCS once again outperformed its closest rival Infosys, far surpassing even market expectations for the quarter ended March. In comparison to Infosys? sequential decline of 1.5% in volumes, led by a degrowth of 2.1% in on site and 1.2% off shore volume, TCS managed to gain 3.8%.
TCS
The country?s largest software services exporter TCS posted a 23% rise in profit for the fourth quarter ended March. Profit during the quarter was R2,932 crore compared with R2,381 crore during the same period last year. Revenue stood at R13,259 crore as against R10,157, up 30.5% a year ago.
?We have carried our strong momentum through the fourth quarter to close out a year of strong growth. We have kept our focus on profitability and consolidated our market leadership,? said N Chandrasekaran, CEO and MD, TCS. Net profit for FY12 came in at R10,638 crore ($2.2 billion), up 22%, while annual revenues were up 31% at R48,894 crore ($10.17 billion).
TCS CFO and executive director S Mahalingam said, ?We have grown very well during 2011-12 and also been able to exit the year at the right margin levels, despite the marked increase in volatility during the past 12 months. Our focus is firmly fixed on the opportunities out there. So while maintaining our cost discipline at an operational level, we continue to invest in capacity and capability as we prepare for growth ahead.? EBITDA and EBIT margin declined by 149 basis points (bp) and 155 bp sequentially to 29.5% and 27.7%, respectively.
Revenue from BFSI, the company?s anchor vertical, remained almost flat qoq due to delays in ramp-ups of discretionary spending. The company bagged six large deals during the quarter. Analysts pointed out that management sounded confident of growing higher than the industry and expects FY13 to be a ?normal year? indicating that revenue from BFSI will pick up from Q1.
Other verticals such as telecom, media and entertainment and lifesciences and healthcare registered revenue growth of 2.4% qoq each. Revenue from telecom has started to pick up and management has indicated that it is witnessing transformation deals in the telecom sector, majorly in emerging economies, and expects revenue to pick up.
?TCS? performance during the quarter was backed by healthy demand seen across industry segments such as retail and distribution, manufacturing and hi-tech, revenue of which grew by 4.1%, 3.7% and 4.1% qoq, respectively,? noted Angel Broking. Service line wise, BPO and asset leveraged solutions emerged as the primary growth drivers for the company posting 9% and 5.1% qoq growth in revenue, respectively.
Growth was across markets during the financial year. North America grew 29.6% to cross $5 billion while Europe including UK grew 33.8%. Revenue from US, Latin America and UK grew 3.0%, 2.4% and 3.8% qoq, respectively. Emerging economies including India and Asia Pacific posted 3.6% qoq and 3.7% qoq growth in revenue. The IT major had 14 clients billing $100 million or more, compared with 8 in FY11.
Infosys
For the fourth quarter ended March, Infosys, posted a 27.4% jump in consolidated net profit, meeting forecasts. The company reported a net profit of R2,316 crore as compared to R1,818 crore in the corresponding period last year. Revenue was up 22.1% at R8,852 crore as against R7,250 crore a year ago. Operating margin decline 130 basis points qoq to 29.9%.
For the full year ended March 31, the company?s net profit was up by 21.88% at R8,316 crore as against R6,823 crore. Revenue went up by 22.7% to R33,734 crore compared with R27,501 crore last fiscal. Sequentially, the fourth quarter saw a profit decline 2.4%, in line with analysts? expectations.
The IT major pointed out that it had a ?very difficult? quarter with revenues declining sequentially. ?Our focus on high quality growth coupled with strong financial discipline helped us to deliver on EPS guidance in US dollar terms,? said V Balakrishnan, Infosys member of the board and chief financial officer, adding that the global currency market volatility continues to be a challenge for the industry.
For the analyst community, the major disappointment was Infosys? dollar revenue outlook of 8-10% for FY13, much below Nasscom?s estimated growth of 11-14% for the IT industry. ?The company?s full year dollar revenue growth guidance of 8-10% reflected extremely volatile environment which lent little visibility and impact from unexpected ramp-down in few accounts. As the ramp-downs started towards the end of the quarter, there is a possibility of a spill-over effect of the same in Q1 of FY13, which explains the company?s tepid guidance of 0-1% in what is a seasonally strong quarter for the industry,? said Motilal Oswal in its research report.
Analysts were expecting the IT company?s revenue forecasts for the current fiscal to be in lower double digits, around 12-15%, in line with Nasscom?s estimates. In rupee terms, the company forecast a revenue growth guidance of 13.9-16% for the current fiscal.
?The year ahead looks challenging for the IT services industry, with slow recovery in the global markets. We are executing on our Infosys 3.0 strategy which is meant to deliver high quality growth in the medium to long term. We are making investments and have put in place a structure to deliver on this strategy,? said SD Shibulal, CEO and managing director, Infosys.
Service wise, revenues from all the service lines, except products, platforms and solutions, declined. The company?s major revenue contributor service?consulting and package implementation?declined by 0.3% qoq. BPO and product engineering services, amongst all the service lines, posted the highest qoq decline in revenues at 9.5% and 7.4%, respectively, noted an Angel Broking report.
Industry wise, revenue from BFSI, the anchor industry vertical contributing 34.3% to revenue, declined by 4.7% qoq, led by 8.6% qoq degrowth in revenue from insurance. Revenues from banking and financial services industry declined by 3.7% qoq. Infosys closed five large deals during the quarter and three of them were above $100 million deals. The IT major and its subsidiaries added 52 clients during the January-March period.
Geography wise, revenue decline was primarily led by North America, which posted 4.1% sequential drop in constant currency terms. Revenue from Europe grew 0.8% qoq. The software services firm added five new clients in Europe in Q4.
Wipro
Software services exporter Wipro posted net profit of R1,481 crore for the January-March quarter, while consolidated revenues stood at R9,869 crore with an annual growth of 19%. Its mainstay IT services business reported a 21% growth to touch R7,590 crore.
Wipro chairman Azim Premji pointed out that the overall macro environment continues to remain volatile while the company has seen some signs of positivity in the last three months of the financial year. ?Customers, however, remain cautious,? he added.
Wipro said that it expects near-flat revenue growth in the current quarter and attributed the muted guidance of -1% to 1% revenue growth to weaknesses in its India business and challenges in the telecom vertical. For the first quarter of FY13, the IT firm expects $1,520-$1,550 million revenues from the IT services business, almost the same as $1,536 million clocked in the fourth quarter.
However, TK Kurien, CEO of the company?s IT business, said that Wipro will meet Nasscom?s growth projections of 11-14%. ?One cannot do much about the environment. What we can control is customer satisfaction and we have started to rate employees on the basis of customer feedback,? he said.
Wipro?s IT services business reported a earnings before interest and tax at R1,694 crore recording a yearly growth of 15% though its operating margins declined marginally during the quarter. The management attributed the dip in operating margins to the acquisitions and sales and marketing expenses made during the last fiscal.
Wipro added 41 new customers for the quarter in its IT services business and 173 new customers during the year. The company which undertook a major overhaul of its operations is looking at ways to mine deeper with customer accounts by forming two separate teams for this purpose. This has resulted in its top 10 customers rowing faster than the company?s average.
Operating margins declined 70 bps to 19.9% and the resultant operating profits grew 15% to R1,961.1 crore. Other income grew 15% to Rs 244.1 crore and interest expense declined 27% to R46.4 crore. The company?s IT products segment recorded revenue of $755 million for the year ended March, an increase of 4% yoy. Revenue for the quarter was $184 million, up 3% yoy. Its IT services recorded a sequential growth of 2% in line with market expectations with a volume growth of 1.3%, while the pricing environment remained more or less stable.
HCL Technologies, the country?s fourth largest IT firm posted a better-than-expected 28.7% jump in net profit for the third quarter ended March. Profit during the quarter stood at R602.5 crore against R468.2 crore, a year ago. While revenues were R5,215.6 crore, up 26% from R4,138.2 crore during the same period last year.
Sequentially, HCL Tech?s net profit increased 5.2% from R572.7 crore in the trailing quarter, while revenues declined marginally by 0.6% from R5,245 crore registered in the quarter ended March 31. For the IT firm, the major highlight during the quarter was deal bookings of $1.5 billion plus across 14 customers excluding contract renewals and over $2.5 billion in the last six months across 32 customers. Management indicated that most of the deal bookings in the last six months came from vendor consolidation.
Vineet Nayar, vice-chairman & CEO, HCL Technologies said, ?We continue to focus and gain market share in this segment as demonstrated by the fact that all our top 10 clients are now Fortune/Global 500 companies. Additionally 88% of over $2.5 billion transformational wins in last two quarters have been signed with Fortune500/Global2000 organisations.?
HCL Tech?s revenue growth was led by modest volume growth of 2.9% in core software services and robust dollar revenue growth of 4.5% qoq in infrastructure services business. Sequential volume growth of 2.9% in core software services was on account of 5.4% qoq offshore volume growth, noted Angel Broking. However onsite volume declined by 3.7% qoq.
?HCL has continued to demonstrate superior financial performance backed by a balanced business portfolio. The revenues this quarter are up 2.5% while EBIT is up by 8.6% over the last quarter. For 12-month period ended March, 2012, our revenues at $4,035 million grew by 22%, our EBIT at $618 million grew by 34% and GAAP EPS (diluted) at $0.62 grew by 38% over the corresponding period last year,? said Anil Chanana, CFO, HCL Technologies.
Manufacturing vertical, which contributes 29% to the revenue, continued its momentum, posting a 0.6% qoq growth. Of the $2.5 billion deal bookings recorded in the last six months, manufacturing contributed 23%. ?Demand in the manufacturing space is coming for business needs related to operational efficiency, cost reduction and product development,? analysts said.
Telecom and healthcare vertical emerged as the primary growth driver during the quarter, as revenue grew 10% and 8.1% qoq, respectively.
Hiring, wage hike and attrition
During the fourth-quarter ended March, TCS added a whopping 19,156 gross employees, while net addition was 11,832, taking its total workforce to 238,583. ?We have successfully undertaken the largest ever hiring effort in our history by adding and integrating 70,400 professionals during 2011-12. With business demand continuing to be robust, we have made 43,600 offers on campuses for trainees to join us from the second quarter of this fiscal year.? said Ajoy Mukherjee, head, global (HR).
During the quarter, attrition rate on a last twelve month (LTM) basis declined to 12.2%, lowest in last eight quarters from 12.8% in Q3. For FY13, TCS expects gross hiring of 50,000 employees. The company has given offers to 43,600 campus graduates for the current fiscal and expects 70% conversion ratio. These employees are expected to join from June this year. The company maintained high utilisation rates during the quarter at 80.6% excluding trainees, while including trainees it was at 71.3%.
TCS gave a wage hike of 6-8% for employees in India and 2-3% onsite. Infosys, on the other hand, announced that it will be withholding wage hikes till it gains more clarity on its business. Wipro says it has no plans to follow suit. Wipro committed to give wage hikes to its employees effective June this year. However, the IT firm did not specify the quantum of average increase across the board, but confirmed that it will be in line with the industry.
Usually, Infosys effects appraisals in the very beginning of the fiscal. Last year, Infosys had doled out 10-12% wage hikes for its employees in India, while onsite hike were 1-2%. Infosys said promotions, however, are still on track for FY13, with 16,000 planned across the board effective April. The IT major stated that it will look at an addition of 35,000 employees this year, 13,000 of which will be for the BPO. Net hiring projections have been a dampener, at 6,000, compared to 19,000 last fiscal. Campus recruits will total 18,000, while on site addition will be 1200.
For Infosys, gross employee addition stood at 10,676, while net addition stood at 4,906 during the fourth quarter ended March. The company had 1,49,994 employees as of March 31. For Wipro, the wage hike is expected in the range of 6-8% in line with the current industry standards. However, this positive momentum was not reflected in the headcount addition for the company. At the end of fourth quarter, Wipro?s IT services headcount stood at 135,920 which was a drop of 814 people when compared to the third quarter.
Wipro said that the decline in headcount was more of a one quarter phenomenon due to certain restructuring in the BPO business though in the IT services segment they made a gross hiring of around 7,500 people. However, the attrition level combining both the voluntary and involuntary stood at 17.5% which is almost a 1.5% fall from the previous quarter.
During the quarter, HCL Tech added 4,697 gross employees, all of them being lateral additions. The company witnessed net reduction of 612 employees due to ongoing restructuring in the BPO business, which took its total workforce to 82,464. Attrition in the software services business declined by 90 bp qoq to 14.4% on a LTM basis. The BPO business had net reduction of 1,031 employees, taking total employee base to 9,990.
Management indicated that, going ahead, utilisation level including trainees would inch up as trainees hired couple of quarters back will start turning billable, which can be an important lever to improve margins.
