The $100-billion information technology services sector has, over the years, has been evaluated on parameters such as wage indexes, volume and pricing. 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, says 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, return on invested capital in contracts, execution capabilities and quality of attrition.
The shift seems relevant, especially in the present environment. Unlike before 2008, Indian companies cannot depend on market share gains; it is an increasingly competitive market. A look at recent reports suggest multinational companies like IBM and Accenture are either increasing their share or holding on to their contracts.
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INFOSYSYS RESULTS TODAY: STREET EXPECTATIONS For the quarter ended December (Rs crore) | ||||
| Sales | % chg* | Net profit | % chg* | |
| Bank of America | 10,157.20 | 9.24 | 2,109.00 | -11.09 |
| Motilal Oswal | 10,054.80 | 8.10 | 2,135.60 | -10.00 |
| Religare | 10,161.00 | 9.50 | 2,260.60 | -3.90 |
| Elara Capital | 10,144.30 | 9.10 | 2,257.00 | -4.85 |
| IIFL Research | 10,055.80 | 8.10 | 2,161.40 | -8.90 |
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* change y-o-y The list comprises Nifty companies. The above are results estimates of some leading research houses Source: Research Reports Data compiled by BS Research Bureau | ||||
Earlier, strong volume and stable pricing absorbed all wage inflation and led to stable profitability (currency-neutral). This seems to have changed. “For example, Tata Consultancy Services reported a year-on-year (yoy) and quarter-on-quarter decline in Ebitda (earnings before interest, taxes, depreciation and amortisation) margin in the second quarter, despite stable ‘core’ metrics and the material benefits of rupee depreciation. Wipro reported an Ebitda margin decline despite a 0.9 per cent yoy 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 this shift must be driven by IT firms. “Oracle and IBM are good examples of how they see themselves in the future and also informing the Street about it. Oracle’s cloud strategy and the management alignment of thought is 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 sectors do agree that the details provided by Indian IT companies are one of the best and transparent; in some cases, better than their global peers, too, “but these details are not forward looking. The fact sheet that we get is of the past quarter. Each company can provide limited details for the future -- some qualitative peak into the future is possible to share,” said a senior analyst from a brokerage company.
Unlike some mid-cap IT firms, none of the top ones give details about deal funnel or order backlog. In recent times, there have been enough instances where top-tier IT firms have spoken about a large number of deal additions 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 dismal over recent quarters. A Nomura Equity research said Infosys over the past four quarters won a total contract value exceeding $4 billion; yet, revenue growth has been 0.7 per cent compounded quarterly over this period.
Other than the deals companies are winning, the way they manage headcount is also undergoing change. With the nature of contracts changing as new platforms and models emerge, analyst also say headcount growth targets will become redundant. “Companies would adopt just-in-time hiring and rebadging is 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.
