Traditional business and growth in US pulls Q1 numbers for IT giants

Traditional business and US growth pulled up the numbers; trio's managements confident on growth

Digital spending and growth was the most talked about but it was growth in the major market, America, and traditional services' line application development management that pulled up the first quarter numbers of the top three information technology (IT) companies this financial year.

A look at the numbers of the top three—Tata Consultancy Services (TCS), Infosys, and Wipro -- shows they started the year with a bang.

Infosys was the best, with numbers that not only surprised but surpassed Street expectations. Followed by Wipro, which gave a strong second quarter forecast. TCS, the country's largest IT services provider, disappointed the Street. Both Infosys and Wipro beat the Street estimate on revenue and and also surprised many by raising their forecast ('guidance').

Infosys increased its dollar revenue growth expectation from 6.2-8.2 per cent to 7.2-9.2 per cent. However, it maintained a constant currency growth expectation for the full year at 10-12 per cent. Wipro after a long time met its guidance for the IT services business in a quarter which is traditionally weak. Dollar revenue for the quarter grew 1.1 per cent; it had said its expected range was a fall of 0.5 per cent to growth of one per cent. Dollar revenues grew 1.1 per cent in reported currency and 0.2 per cent in constant currency terms.

More important, Wipro said it expected dollar revenue of its IT services business to be $1,821-1,857 million, growth of 1.5-3.5 per cent over the June quarter. “If you look at TCS and Infosys, there were a lot of similarities. Both grew in the US, pricing declined and both had muted headcount growth. The only difference was in the one case, consulting and SI (system integration services) grew and in the other, consulting was under pressure. But again ADM (application data management), IMS (information management systems) and testing grew in all three,” said an analyst from a foreign brokerage house, on condition of anonymity.

The management of all three companies sounded confident about growth and particularly stressed on what was being seen in the digital segment. However, as mentioned earlier, it was the traditional business that grew, with strong growth in the US, where the growth was 4.4 per cent, 5.1 per cent and 2.8 per cent, respectively, for TCS, Infosys and Wipro.

Along with the US, client mining efforts showed clearly in the case of Infosys and Wipro. TCS has had a better record in this. During the quarter, it however looks like Infosys has finally got around this, as its largest client is now a $300-million account. It added two clients in the $200-mn list. In the case of TCS, the growth in ADM and IMS was 4.1 per cent and 5.1 per cent, respectively.

“The traditional business will drive growth, as 60-70 per cent of revenues still come from ADM. All three have the same outlook. Digital is happening but is not yet a major number to contribute; beside, its nature keeps changing. Infosys was best in the pack, followed by TCS. Though Wipro did well, its dollar revenue in constant currency is only 0.2 per cent,” said Sarabjit Kour Nangra, vice-president, IT research, at Angel Broking.

Hitesh Shah and Abhishek Gupta of IDFC, in their report on Infosys, said: “Growth acceleration (11 per cent year on year in constant currency terms versus eight per cent in the second half of FY15 and six to seven per cent in the first half) and large deal-win momentum support our view that Infosys’ renewed strategy would help converge growth with that of peers. Also, fall in attrition and client hunting/mining initiatives are showing encouraging signs that give us confidence.”

Digital as a segment also started to make real numbers during the first quarter of FY16. TCS for the first time had 12.5 per cent of its total revenue from here. Infosys continued to share deal wins due to the acquisitions it is making in this segment. For instance, acquisition of Panaya added 16 deals this quarter. In the case of Wipro, the company has 70 deals on its automation platform.