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Performance of IT companies during the September 2013 quarter has been better than general expectations. Businesswise order flows have been good, operational wise companies have reported better margins and the traction is clearly visible across the board.
Market has mostly rewarded the companies well before and after the results, except Wipro which witnessed some selling on the day after its results. The underlying message is IT sector is back in the limelight. The rising tide as a result of buying will take all companies higher, but for an investor it makes sense to be with the leader.
However, in the current uncertain environment where a small event has to potential of triggering a financial tsunami, safety takes precedence over rapid growth. The top four software companies derive a lion share of their revenue from the US and European markets. Both these markets are vulnerable to financially risky events and ongoing slowdown.
Slowdown is the least of worries as it offers an opportunity for outsourcing as a measure of cost cutting. Financial risk in the form of tapering and defaults are unknown devils which have the potential of not only crippling the financial markets but impacting the IT sector too. Most of the top IT companies derive a major portion of their revenues from the financial sector.
A comparison of the results of top IT companies gives us an opportunity to identify companies which are geared up for faster growth, would be more vulnerable in case of a financial calamity or those that are most risk averse as their client base is spread out across the globe and across various verticals.
We monitor the four companies on the basis of various parameters and comparison is done on a percentage basis to standardise the impact of size. To get a true picture performance of the company over a longer period of time needs to be compared with similar period of others. However, in the present case we will only take the result of September 2013 quarter to get an idea of where the four players currently stand.
Financial Performance
Along with size, effective use of its resources is important to pick a winner. A company that has high volume growth or constant currency growth is equally important as one with a higher gross margin, because this suggest it is able to extract the most from its resources.
TCS is the clear leader in size, growth and profitability. Part of the reason is that the company spends the most in sales and marketing, plus its size offers the company to get a better and bigger deal. Little wonder then that the company gets the highest discounting in the market.
Human Resources
Managing growth in the IT sector has a lot to do with managing its input -- human resources. Erecting beautiful buildings is as important as creating a conducive atmosphere to work and learn for employees. Further, making effective use of them and ensuring that they are on the job immediately after training helps in overall financial growth.
Employees added during a quarter gives an idea of the order-flow that the company is envisaging going forward. However, if utilisation rate is low and there are more people on the bench the company would still not hire but can utilise its existing resource to bid for new orders. The employee addition growth number will thus be seen in future quarters.
In September quarter HCL Tech has been the most aggressive in adding employees and has the highest utilisation rate, an indication that we can expect good growth numbers going forward.
Operations
As discussed earlier geographical as well as vertical spreads are a sign of a de-risked business model. Bagging big clients during the quarter is also a sign that there can be higher growth expectation in future as well as a long term marquee client who can stabilise earning spikes.
Despite the lowest contribution from financial space HCL Tech has posted a creditable growth by deriving numbers from the manufacturing sector. However, lower new client addition is a sign of worry but when combined with the number of employees added aggressively during the quarter it indicates that the company might be expecting increased order from its existing clients.
