On Friday, India’s third largest IT services company Wipro will announce its results for the three months ending September 30, 2012. With that, half of the year would have passed and a clear picture of the $70 billion services industry’s health will emerge.
The industry, which accounts for 7.5% of India’s gross domestic product and employs an estimated 2.8 million is expected to have a tough year ahead. Ever since the financial crisis of 2008, the software and services sector has never fully recovered.
From the crisis in Greece which spread to rest of Europe to unemployment in the US, election year rhetoric and visa abuse allegations, the IT industry has gone through hell last year. Even an optimistic prediction by India’s software lobby Nasscom pegs export of IT-BPO services to grow between 11- 14% in FY13 whereas last year, exports grew 16%.
The special case of Infosys
“Slow burn,” is how Infosys’ Vice Chairman Kris Gopalakrishnan puts it. S D Shibulal, the company’s present chief executive officer repeatedly communicates to the markets that the company continues to face “global economic uncertainties.” So much so, that it had to give up its long standing habit of predicting quarterly estimates.
Infosys cut its forecast again to $7.3 billion for the year ending March 31, 2013 or 5 % year on year. Despite acquiring SAP implementation company Lodestone for $ 330 million in September, Infosys’ management was reluctant to project optimistic numbers the markets were counting on.
Though its second quarter profits grew 24.3 % year on year to Rs 2,369 cr on a topline which grew marginally to $1.79 billion, the company’s shares closed 5.4 % down on Friday, two weeks ago when its results were announced. What gives?
Analysts say that Infosys’ is a special case. The company under new Chief Executive Officer, S D Shibulal is executing a new strategy called Infosys 3.0. At the heart of the strategy is the company’s desire to move to higher value business. This means letting go of commodity business which comes at the cost of margins. Some call it the result of Infosys’ obsession with margins and some call it the company’s way of prepping for the future.
What Shibulal is attempting to do is akin to changing the engines of a plane mid-flight—a particularly bold strategy to pursue when rivals are aggressively pushing to gain share of more commoditized projects that include contracts to manage computer infrastructure remotely [Mint]
The company is on the lookout for newer acquisitions in the products and platform space. In the next 5-7 years, Infosys wants to meet one third of its annual revenues from products and platforms which presently contribute to 6 % of its revenues.
Whichever way it plays out, it might be a couple of quarters more before all of it shows up on the balance sheet. The good news this time is that the company announced 6 % wage hike to employees.
TCS beats estimates
For some time now, the numbers of Infosys and its chief rivals have been telling two different stories. Tata Consultancy Services, the largest IT services company in India by revenues reported an impressive 44 % jump in profits to Rs 3,512 crore on a topline which grew 34.3 % year on year to Rs 15,621 crore in rupee terms.
The company did not disappoint investors who pushed up shares 2 % ahead of the second quarter results on October 19. Its management has also been a bit more cheerful about the outlook for the year ahead. Chief Executive Officer of TCS, N Chandrasekaran says that it will grow above Nasscom estimates in volumes. Both Cognizant and HCL Technologies have made similar claims.
Analysts at Nomura feel that TCS had a “reassuring” quarter with a bullish demand outlook and indications of a pickup in spending. Unlike Infosys, the Tata company saw its margins dip 70 bps quarter on quarter. This was not a concern, as the management’s EBIT margin targets of 27 % provides comfort, wrote Nomura’s Ashwin Mehta and Pinku Pappan in a recent report.
HCL springs a surprise
HCL Technologies reported a stunning 78% increase in net profit to Rs 885 crore as compared to Rs 497 crore in the same quarter last year. Revenues of the company were at Rs 6,901 crore, up 31 % year on year. In a television interview, the company’s Chief Executive Officer Vineet Nayar said that the next 60 days will be very crucial to the IT industry as 100 % more deals will happen in the second half of the year compared to the first half. According to data from TPI, $20 billion of contracts got renegotiated in the first half of the year. HCL has a very sharp focus on deals up for renewal.
How do you think services companies will fare in the future?