 "Extended furloughs and holidays to make Q3 a much weaker quarter")
Traditionally the third quarter has always been a soft quarter for Indian IT players as the quarter has less number of working days due to holidays and, furloughs in the manufacturing sector. This time around however, furloughs seem to be impacting the banking and finance sector and retail as well.
The first clue came in from Infosys, which despite a better-than expected numbers said that the third quarter numbers will be impacted due to extended furloughs in sectors other than manufacturing.
During the analyst call Pravin Rao, chief operating officer, Infosys explained analysts that the company though is aware of the headwind present in the third quarter there are additional issues.
"In financial services by and large we are seeing good momentum but we are seeing challenges in insurance sub-segment and in addition we also expect to see little bit more of impact from the furlough perspective because banks are also now looking at aggressively cost cutting measures, so we anticipate some amount of furlough impact as well which historically we had not seen in the past," said Rao.
This was one of the reasons why even after a good set of numbers Infosys did not revise its guidance for the full year.
Furloughs, according to Wikipedia definition is temporary leave of some employees due to special needs of a company which may be due to economic conditions at the specific employer or in the economy as a whole. Furloughs have been used primarily by the manufacturing segment and by the government sector in the US. Generally furloughs are for two weeks. Many companies use furloughs as a way to keep payroll costs in check.
The second set of warning came from T K Kurien, CEO, Wipro. For the company the third quarter has traditionally been a strong quarter but it gave one of the weakest ever guidance. The company guided for a sequential growth of 0.5% to 2.5%, weakest since third quarter of FY09.
So even after Wipro stating that the second half of the year will be better than the first half, the softness in Q3 will impact its growth. "Weaker than expected guidance for a seasonally strong quarter diminishes any hope for double digit revenue growth in FY16," said a report from IDFC Securities.
Kurien clearly stated that clients are not yet decided on the tenure of furloughs and that isone of the reasons for uncertainty for Q3.
"If I look at it last every year when October comes along we do a poll of our customers to get a sense of what the furloughs would look like as they go towards the end of the quarter. We are seeing some guidance from some of our Manufacturing customers, Banking and Financial Services customers and also some of our Retail customers if they may have furloughs in December. It is right now tentative but in cases where we have got T&M contracts it is very difficult for us to go out there and collect revenue especially when they are on holiday," said Kurien during the analyst call.
He further elaborated that the other reason for the extended furloughs is the uncertainty among clients. "Across some of the segments that I talked about, there is clearly pressure on the run side of the business. Not necessarily on the change side of the business, but again if they have a furlough right now it is a little uncertain to ask as to whether the furlough is going to extend to the change side of the business which is typically programs driven by business or whether it is going to be only restricted to IT. And I think that is where a little bit of uncertainty is coming in," he added.
Peter Bendour-Samuel, CEO of Everest Group believes this will impact discretionary spending. "Companies are clearly using furloughs as a way to keep cost down. This does not bode well for the growth of the industry. With the industry in its mature state most growth is driven by re-competes ie, transformation and discretionary spending. BFS is the largest market segment and with a slowdown indicated by furloughs we can expect discretionary spending to be cut. Furthermore large transformational projects are hard to push through or initiate when companies are focused on immediate cost cutting such as furloughs. The re-compete will continue but this will drive pricing reductions," said he.
