Q3 numbers mixed bag for top four IT players

Consistent management commentary for CY15; digital spends gaining traction

The earnings of major information technology (IT) companies for the quarter ended December last year were a mixed bag. While Infosys and HCL Technologies recorded robust growth, Tata Consultancy Services (TCS), which has been reporting stellar numbers for the past few quarters, reported subdued earnings for the December quarter, typically a slow one for the sector.

HCL Technologies, which fared the best among the top four companies in the segment, reported growth of four per cent in dollar revenue and 6.2 per cent on a constant currency basis, with growth in both its services and infrastructure management services and engineering verticals. The 6.2 per cent growth was the best in the past 16 quarters.

Infosys, India’s second-largest IT services provider, took the markets by surprise, reporting healthy volume growth of 4.2 per cent in a seasonally weak quarter. The company’s volume growth was one of the best in three years.

The biggest surprise from Infosys was the fact that it maintained its full-year forecast of seven-nine per cent growth (in constant currency terms). The Street had expected it would cut the estimate or maintain it at the lower end of the forecast, owing to currency volatility and a traditionally soft quarter.

TCS, India’s largest IT services provider, also surprised the Street by reporting subdued volume growth numbers. Though volumes grew 0.4 per cent, the company said realisation for the quarter rose 2.3 per cent. Overall, the company’s earnings for the quarter were in line with estimates.

Despite variation in the results of the four companies, the management commentaries were similar; all sounded positive on growth this year. Another common observation was an uptick in clients’ spends in the digital segment.

“In their recent third quarter FY15 post-results commentaries, the Wipro and TCS managements highlighted the demand environment in the US was being driven by digital technologies. Client engagements are also becoming more strategic and long-term in nature, according to the management, which indicates the strength of demand in this space, in our view. This is highlighted by the bullish commentary from IBM and SAP, which have reported strong growth in revenue from digital technologies in the December quarter,” Bhuvnesh Singh and Hitesh Das of Barclay’s Equity Research said in a report.

Another common factor in terms of growth during the quarter and the momentum was Europe. Across companies, Europe was the growth driver during the quarter. In case of TCS, operations in continental Europe expanded four per cent, while for HCL Technologies, European operations grew 7.2 per cent.

Analysts tracking the sector are bullish on growth. “We maintain our constructive outlook on IT services on the back of strong hiring trends, increased outsourcing from Europe, an improving US economy, a trend towards digital technologies and a stable and large deal market. All these factors indicate growth in 2015 should be similar to that in 2014, though macro fluctuations might weigh on the sentiment,” said Atul Goyal and Vibhav Dhasmana, equity analysts at Jefferies equity research India.