Vineet Nayar, vice-chairman and chief executive of HCL Technologies, on Wednesday summed up the story of India’s top four information technology services firms in the words “challenges can be converted to opportunities”. This seems true for Tata Consultancy Services (TCS) and HCL Technologies, which, despite the challenging macro environment, recorded robust earnings for the quarter ended June. In the process, they left Infosys and Wipro, which struggle with internal restructuring, behind.
“I think what is working for both TCS and HCL Technologies is their strategy. For TCS, it is about scale, in terms of presence, skills and capability. Add to this their approach towards creating intellectual property and their non-linear strategy ahead of time….HCL Tech has been an aggressive player. Its chosen areas are infrastructure services, engineering and ERP (enterprise resource planning). I think for HCL, its focus on the specialisation and domain competency is playing out,” said Sudin Apte, research director and chief executive, Offshore Insights. Both companies recorded growth of about five per cent in their banking and financial segments, despite pressure on this vertical increasing globally.
TCS reported volume growth of 5.3 per cent for the quarter ended June. The company’s revenue stood at Rs 14,869 crore, a sequential rise of 12.1 per cent and a 37.7 rise over the year-ago period. TCS said it saw growth across markets, industries and service lines. Despite increasing salaries, the company also managed to improve margins.
For HCL Technologies, growth was driven by its infrastructure services vertical, which grew 9.2 per cent on a sequential basis, followed by enterprise application services (4.8 per cent sequential rise) and IT services (4.9 per cent sequential rise). The company’s earnings before interest and tax margin for the quarter ended June was 19.4 per cent, compared with 15.7 per cent in the previous quarter, while its earnings before interest, tax, depreciation and amortisation (Ebitda) margin improved to 22 per cent. The business process outsourcing business continued to be sluggish, reporting a fall of two per cent in growth. Growth in custom application services stood at 2.3 per cent.
However, more than the numbers, it was the commentary of the management at both companies that differentiates them from their peers. N Chandrasekaran, chief executive and managing director, TCS, said, “We entered this year with certain learning. Customers understand the macro environment would be dynamic and they are making plans based on that. We need to be close to our customers to understand this change.”
“Overall, IT spends are flat, but despite this, technology spends continue. I think challenges can be converted into opportunities. New budgets for IT spends fell 40 per cent in the first half this calendar year, but restructuring contracts are up 20 per cent. There is a significant churn in the renewables market,” said HCL Technologies’ Nayar. HCL, which also reported its full-year results (it follows the July-to-June financial calendar), added 52 transformational deals.
“If we have to look at the top four companies, clearly, TCS and HCL Tech have performed well. Operating margins have always been a concern for HCL Tech. Now, the management’s focus to improve this has paid off. This quarter, the company reported a sequential rise of about 360 basis points in the Ebitda margin at 22 per cent, which is commendable. They are better placed in the IMS (infrastructure managed services) space than Wipro, which has a similar offering,” said Ankita Somani, research analyst (IT), Angel Broking.
Wipro and Infosys, meanwhile, are still grappling with internal issues. Wipro said it had progressed well, with regard to adding clients, though it could have fared better. “Our strategy is to play out in three phases. First, grow the existing client base so that we continue to get short-term sustainable revenue. Second, invest and broaden our customer base. Third, look at our canvas and see how we do not get caught in the vagaries of the client business. We have progressed well on the first phase, the second phase would take another eight to 12 months and the third would be a year-round story. Could we be faster? Yes, but this is where we are,” said T K Kurien, chief executive of Wipro IT business. Positives for the company included its ability to add large customers, which rose five per cent this quarter.
Analysts expect it would take a while for Wipro and Infosys to return to industry-leading growth figures. For Wipro, results for the quarter ended June were not as disappointing as its guidance for the quarter ending September. However, Infosys disappointed the market. Not only were its results for quarter disappointing, it did not give guidance for the quarter ending September and cut its guidance for 2012-13 to five per cent.
“While both Infosys and Wipro have been late in adapting to the new demand environment, issues related to growth at Infosys and Wipro are fundamentally different,” Sandeep Muthangi of IIFL Capital stated in a report.
Infosys, he stated, faced difficult choices, as it adapts to the new demand environment. The continued commoditisation of traditional IT services implies Infosys would find it difficult to maintain its premium pricing during contract renewals.
“While we like its aggressive investment in products, platforms and solutions, given its small base, this is unlikely to influence the company’s growth rates or margins in the medium term. Also, its efficient age pyramid is turning out to be a margin headwind, as it is able to hire fewer resources at the bottom of the pyramid. Consequently, we believe the issues at Infosys are structural, and adapting to the new demand environment is work in progress,” he added.