Currency, shift in deal structure impact Q4 numbers of IT players

The top four information technology companies not only missed their fourth-quarter estimates but also delivered disappointing annual numbers. The silver lining, however, was in their managements’ expectations of better growth in 2015-16.

Currency volatility, shorter deal cycles, pressure on sectors like telecom, insurance and energy, and a uniform shift in deal structure affected performance in 2014-15. Investors were expecting a drop in profit due to currency volatility, but were not prepared for the dip in revenue.

“What came as a surprise was the low top line numbers, especially for Tata Consultancy Services (TCS) and Infosys. The dip in revenue suggests decision-making has slowed and services revenue is moving towards software as a service and the cloud,” said Sudin Apte, chief executive officer (CEO) and research director of Offshore Insights.

TCS posted a 1.1 per cent sequential decline in revenue, Infosys 2.8 per cent and HCL Technologies 0.2 per cent. Wipro was the outlier, with a growth of 1.2 per cent.

“There is a shift in the market. Clients are looking to transform their business and move to digital. Indian companies are preparing to be part of this change,” said Sandra Notardonato, research vice-president and investment analyst, Gartner.

“New growth areas in cloud, digital, and software-as-a-service are based less on arbitrage, reducing the competitiveness of the big Indian firms,” said Peter Bendour-Samuel, CEO of the Everest Group. “This is a permanent change and unless Indian firms can gain leadership in the new areas, they are looking at slower growth,”  he added.

Notardonato said 2014 was expected to be a slow year, but 2015 would see an acceleration in infotech spending. “We saw a slowdown in the energy vertical and the financial sector. There will be pockets of challenges in 2015,” she said.  For 2015, Gartner said spending on infotech services would grow 3.7 per cent in constant currency, better than last year’s growth rate of 3.4 per cent.

Infosys, the only company that provides an annual forecast, said the company would grow 10-12 per cent in 2015-16, faster than the seven-nine per cent projected for the previous year. Wipro said its revenue growth for the first quarter of 2015-16 would be 0.5-two per cent in constant currency.

Analysts expect 2015-16 will be a better year but Indian infotech companies will need to draw up strategy around new technologies. “We conducted a survey of 400 clients at the start of this year. There is no slowdown in demand. But as software-as-a-service and cloud become mainstream, there will be an impact on application services’ revenue. This is big for Indian firms,” Apte said.