Despite lesser working days in the third quarter (October -December), India’s top two information technology (IT) services companies — Tata Consultancy Services (TCS) and Infosys Technologies — delivered robust numbers. But Bangalore-based Wipro Technologies, the third-largest IT company, faltered with subdued volume growth and flat margins.
The results of the top three IT companies generally set the tone for the entire industry. Infosys and TCS reported better results in the third quarter, thanks to an uptick in global technology spending.
“TCS is the clear-out performer in the pack, followed by Infosys. Wipro has been a laggard for some time now. We think it will remain so for a few quarters ahead too,” said an analyst at a leading brokerage.
In a traditionally weak quarter, TCS registered a volume growth of 5.7 per cent, compared to Infosys’ 3.1 per cent and a disappointing 1.5 per cent by Wipro. The strong volume growth was reflected in the top line and profit growth for TCS and Infosys. The last five quarters have witnessed robust volume growth of over 40 per cent for TCS and around 35 per cent for Infosys. Wipro is lagging with 25-30 per cent volume growth.
Net profit of TCS was up by 30 per cent on a year-on-year basis, while revenue grew by 26.3 per cent. Infosys posted a net profit of Rs 1,780 crore, up by 14.2 per cent, while revenue increased 23.8 per cent.
“The December quarter performance of top IT players met street expectations. We are positive on all large cap IT firms, with TCS expected to lead the growth and Wipro being the least preferred. We expect pricing to go up in the second half of 2011-12, but volume growth for IT companies is expected to continue,” said Rohit Kumar Anand of PINC Research.
“Poor volume growth was led by lower exposure to banking vertical (27 per cent of revenue vs 35 to 45 per cent for Infy and TCS), and weakness in the technology vertical and healthcare verticals (eight per cent each of revenue), which saw around 3.5 per cent q-o-q (quarter-on-quarter) decline each. Second, as we had anticipated, fulfillment issues could have restricted participation in some discretionary IT spending related projects,” said Mitali Ghosh, Pratish Krishnan and Kunal Tayal from Bank of America-Merrill Lynch in their report.
| GROWTH CURVE | |||
| In Rs crore | Wipro | TCS | Infosys |
| Sales | 7,820.20 | 9,663 | 7,106 |
| % growth | 0.6 | 4.1 | 2.3 |
| Ebitda (%) | 21.0* | 30.0 | 30.2 |
| Net profit | 1,325.9* | 2,370 | 1,780 |
| % growth | 2.0 | 9.3 | 2.5 |
| EPS | 5.4 | 11.9 | 31.1 |
| Volume growth (%) | |||
| Q3 ‘10 | 4.7 | 6.6 | 6.1 |
| Q4 ‘10 | 4.1 | 4.0 | 5.2 |
| Q1 ‘11 | 4.7 | 8.1 | 7.6 |
| Q2 ‘11 | 6.6 | 11.2 | 7.2 |
| Q3 ‘11 | 1.5 | 5.7 | 3.1 |
| Note: Financial figures are consolidated and for Dec 2010 quarter Growth in figures is on q-o-q basis * Wipro’s net profit and Ebitda are of the group Source: Companies | |||
Despite variations in revenue and volume growth, the three companies managed to hold on to their margins, especially when the rupee appreciated by 3.5 per cent against the dollar and the industry struggled with attrition.
“One thing constant among the three has been margin for the quarter, which has been the same compared to the last quarter. Earnings before interest and tax in case of Wipro was 22.2 per cent and TCS reported 28.1 per cent that was similar to the last quarter. Infosys’ 30 per cent, too, was same. The only other positive for the three is the improvement in the billing rate,” said Dipen Shah, senior vice-president (PCG Research), Kotak Securities.
In the IT industry, hiring is an important indicator towards top line growth. TCS revised its hiring guidance by 12,000-15,000 for the fourth quarter, surpassing its earlier target of 50,000 employees for this financial year. Infosys plans to make 5,900 gross additions in this quarter. Wipro, on the other hand, added net 3,591 people in the last quarter, its second lowest net addition in the last five quarters.
TCS’ hiring targets for the next quarter and an almost 50 per cent rise in its campus recruitment for 2011-12, point towards a stronger revenue visibility in the coming quarters. Toeing the line of Infosys, Wipro, too, indicated a weaker recovery in global demand. For the fourth quarter of this financial year, Wipro expects IT services revenues to go up by three-five per cent to $1.38-1.41 billion q-o-q, down from 5.6 per cent in the third quarter. Though this is higher than Infyosys’ guidance of one-two per cent growth, analysts are skeptical about Wipro being able to achieve it, given the fact that it has rarely beaten its guidance.
Wipro clearly has some catching up to do. The growth is lower than even HCL Tech, India’s fourth-largest IT player, which posted a 6.5 per cent gain in volumes during the quarter.
