Wipro sees a silver lining in Q1; others say recovery by 2009-end.
Results for the fourth quarter ended March 31, 2009, and full-year numbers (except for HCL Technologies, which declared its third-quarter results) of the top four information technology (IT) firms reflect the pain the sector has been feeling in the past two quarters due to the global slowdown.
When compared with the trailing (October-December 2008) quarter, only HCL Technologies posted a jump in revenue (of 16 per cent). However, this was primarily due to revenue from the recently acquired Axon group. Wipro saw a dip of nearly 3 per cent in revenue, Infosys a 2.6 per cent decline and Tata Consultancy Services (TCS) a dip of 1.5 per cent (it would have been lower if the estimated $71 million from the recent acquisition of TCS eServe, former Citigroup Global Services, was not added).
The low top-line growth was primarily due to lower rise in volume and lower prices (due to renegotiation), slow decision-making and cut in IT spending by companies.
A shift to offshore locations also affected revenue growth. For instance, a significant 410 bps q-o-q (quarter-on-quarter) offshore shift had an adverse impact of 2.39 per cent on TCS’ top-line growth, according to Harit Shah, analyst, Angel Broking.
Hardik Shah, analyst with Asit C Mehta, attributes the drop in Infosys’ revenue growth (in constant currency terms) to a 0.9 per cent fall in volumes and pressure on billing rates, which are sequentially down 2.1 per cent.
Profitability also took a hit, except in the case of Wipro, which saw a marginal 0.5 per cent rise in net profit. HCL Tech was the worst-hit, with a 41.6 per cent dip due to a foreign exchange loss of slightly over Rs 200 crore. All these companies also took a hit in dollar terms (US GAAP), despite appreciation of the US dollar against the rupee.
Ideally, every percentage rise in the value of dollar adds 30-50 basis points (bps) to the operating margins of the IT firms. However, the hedging strategies of companies like Wipro, TCS and HCL Tech went awry and they could not benefit much from the 4 per cent fall in the value of the rupee this quarter.
“Wipro has clearly been the best among the top IT players in numbers for the fourth quarter as well as guidance. I think the centralised delivery/factory model the company has introduced is finally coming into play. Moreover, some verticals like manufacturing, healthcare and retail are peaking for the company, thus offsetting the weakness in the technology and telecom vertical. TCS is facing the brunt of the slowdown in the BFSI, telecom and manufacturing segments. For Infosys, telecom and financial services have been the pain points,” said a senior analyst of Edelweiss.
He added that unlike Infosys and TCS, Wipro was not saddled with utilisation issues. Hence, the company would not be taking too much margin downsides in FY10 on account of benched staff, he said.
On the positive side, a common theme among these players was operational efficiency and cost optimisation, said analysts. This was done by either reducing headcount, controlling employees and selling, general and administrative costs, increasing the fixed-cost component and more aggression in getting new deals.
Going ahead, the Wipro management is bullish that the scenario is likely to get better from the first quarter (April-June 2009) of FY10 itself. Wipro’s rivals, TCS and Infosys, on the other hand, are categorical that the uncertainty will continue for another two-three quarters. Wipro’s bullishness stems from the feelers it is getting from its consulting business. Its management says this gives a good clue to how deals will flow during the year.
“The guidance of Infosys for next year is almost in line with expectations. I don’t think the company has been too conservative. Since we are already into the first quarter of FY10, Infosys does have some visibility and that’s why the quarter is expected to be weak. The disappointment was the billing rate cuts in Q4 of FY09,” said Dipen Shah, IT Analyst & VP, PCG Research, Kotak Securities.
Despite its conservative guidance, many analysts still lay their bets on Infosys.
“Infy’s guidance was a bit conservative, but it still remains the top pick. It is certainly being helped by a lower hedging position,” said Anil Advani, head of research, SBICAP Securities. SBICAP, in its report on the company, said their new estimates factored in a 6 per cent fall in pricing, which in large part would be set off by benefits of rupee depreciation (expect FY10 average INR/USD rate to be Rs 49) and 7 per cent volume growth from the second half of FY10.
