The $100-billion IT services industry over the years has been evaluated on parameters like wage index, volume and pricing. But with the industry in the midst of a shift, analysts are asking if it is time for a shift in the financial model.
Kawaljeet Saluja, research analyst of Kotak Institutional Equities points out in his report that it is perhaps time to move from volumes, pricing, sequential growth rates, attrition, utilisation and wages, to order backlog, new bookings, execution time frame, employee productivity, year-on-year growth rates, RoIC of contracts, execution capabilities and quality of attrition.
The shift seems relevant especially in the environment in which the IT players are operating. Unlike the period before 2008, Indian players cannot depend on market share gains in an increasingly competitive market. A look at the recent reports suggests that MNC players like IBM and Accenture are either increasing their share or holding on to their contracts.
Earlier a strong volume with stable pricing absorbed all wage inflation and led to stable profitability (currency-neutral) in the past. However this seems to have changed. “For example, TCS reported a y-o-y and q-o-q decline in EBITDA margin in the second quarter of FY13 despite stable ‘core’ metrics and material benefits of the Rupee depreciation. Wipro reported EBITDA margin decline despite a 0.9% y-o-y increase in realisation and Rupee depreciation tailwinds. The biggest source of margin pressure for Infosys has been a sharp rise in onsite per capita wage costs, inexplicable by ‘normal’ wage inflation assumptions,” said Saluja, Rohit Chordia and Shyam of Kotak in their report.
Analysts also believe that this shift must also be driven by the IT firms. “Oracle and IBM are good examples of how do they see themselves in future and they are also informing the street about it. Oracle’s cloud strategy and the management alignment of thought are clear when you hear the company share numbers and details on strategy. For IBM it is about analytics, and they have aggressively spoken about the Smart Planet,” added another analyst.
Analysts across the sector do agree that the details provided by the Indian IT players are one of the best and transparent, in some cases they are better than their global peers too, “but these details are not forward looking. The fact sheet that we get is of past quarter. Each company can provide limited details for future, some qualitative peak into the future is possible to share,” said a senior analyst from a brokerage firm.
Unlike some of the mid-cap IT firms, none of the top IT players give details about deal funnel, or order backlog. In the recent times, there have been enough instances where the top-tier IT firms have spoken about large number of deal addition but that does not reflect in revenue growth. Both, Infosys and Wipro have added a healthy number of clients, but the revenue growth has been dismissal over the last few quarters.
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A Nomura Equity research said that Infosys over the last four quarters won total contract value (TCV) exceeding $4 billion, yet revenue growth over the last four quarters has been of the order of 0.7% compounded quarterly growth rate (CQGR).
Other than the deals that the companies are winning, the way companies manage their headcount is also undergoing change. With the nature of contract changing as new platform and models emerge, analysts also point out that headcount growth targets will become redundant.
“Companies would adopt just-in-time hiring and rebadging likely to become an important component of growth. We are not suggesting that companies would not have an internal target utilisation rate. However, we believe the ability to control this metric will increasingly go down and utilisation rate changes over short time frames [a quarter or half] would be more an outcome of the nature of business flow than a strategic management choice,” said the Kotak report.