The results of top four information technology companies highlight the challenges and opportunity for the IT sector. Not only do the results of these companies guide us on their performance in the near future but it also gives an idea on how some smaller companies will fare in the near term.
From an investors point of view, the natural choice of investment will be to bet on the fastest growing company but one should also look at the business model which can capitalise on the evolving opportunities going forward. One way to judge that is by looking for tell-tale signs among the four companies in various parameters to guide us to pick up the winner.
The sector and geographies that the companies cater to gets reflected either in the revenue growth or margin numbers. Anticipation of growth gets reflected in the employee utilization, attrition and hiring numbers. Without complicating the comparison on the geographies and sectors that each company cater to we shall look at the above mentioned parameters which to a large extent capture the present and immediate future.
We will attempt to compare the four companies on the same set of parameters to get a feel of how they are performing.
Revenue Growth
On account of the revenue mix across various countries in various currencies for the four companies, it is better to look at the growth numbers in constant currency terms. While some would like to look at volume growth, it may not necessarily mean good for the company as it could be on account of low margin business.
On a constant currency growth, Infosys is a clear leader posting a higher growth rate of 6.9% followed by TCS at 3.9% for the quarter ending September 2015. Volume growth of TCS however was higher at 4.9% compared to 3.7% for Infosys, but it’s the quality of work that matters more than the quantity.
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Wipro posted a growth of 3.1% while HCL Tech was the slowest at 1.2%. HCL Tech had already warned of a slower quarter much ahead of the company’s results announcement on adverse impact of 70 basis points due to currency, project cancellation and rising complexity and delays in the IMS business. However, Edelweiss has pointed out that the company has given a strong outlook citing healthy deal pipeline and robust order book.
Operating Margins
On margins front TCS is the most efficient with an EBIT (earnings before interest and tax) margin of 27.1% followed by Infosys at 25.5%, Wipro at 20.7% and HCL Tech at 20%. Commenting on TCS margins, Barclays says that the company’s margin benefitted on account of currency movement but going forward discretionary IT spends can lead to better margins. Analysts however are cautious on Infosys on the margin front. The company is trying to acquire bigger orders which can put pressure on the margins and one need to closely watch it going forward feels Citi in its report.
Utilisation
IT sector is all about number of employees a company has and how efficiently they are managed. The size of a project is not only determined by the value of the project but also by how many employees will be put to work on the project. For an IT company how efficiently it uses this resource goes a long way in determining its performance.
TCS, the biggest IT company in the listed space in India has the highest utilisation rate of 86% followed by HCL Tech at 83.6%. Wipro has an utilisation rate of 82.3% while Infosys is at the bottom with 81.3%. An important point to note is that the number cannot be looked at in isolation of a single quarter. Thus while the utilisation of TCS which is at the top of the list looks good, it has come down by 0.3 per cent and Infosys which is at the bottom of the list has seen an improvement of 1.1%.
Attrition
One of the biggest problems for an IT company is employee attrition. Employees hop companies either due to growth opportunities, exciting projects, better technology platforms to work, off-shore posting or simply on account of Human Resources issues. Number of employees leaving a company impacts the deliverable in a project and reflects badly on the company. Analysts track this number to gauge the health of the company.
Infosys was having employee issues well before Vishal Sikka took over the reign of the company. For a few quarters it did seem that the company will be able to control the flight of employees leaving the company as perks and promotions were generously offered, but the September 2015 quarter shows that the number has increased once again.
Infosys posted an attrition rate of 20.4% as compared to 15.5% for TCS and 16.3% and 16.4% for HCL Tech and Wipro respectively.
With the CFO of Infosys announcing his exit market is abuzz with HR rumours of issues in the company. But this can be expected with a change in top management as the new team settles down.
What comes out clearly in the comparison is that the top two companies TCS and Infosys are in a different league when it comes to growth or operating margins and the gap keeps on increasing with every passing quarter. Their size gives them the advantage of getting bigger orders and leg room for better rates. Efficient employee management however, remains and will continue to remain a challenge for top four.
Nomura feels that Wipro will be the least preferred company among the top IT companies on account of weaker positioning in developed market as reflected in lower growth rates and margins.