In the absence of any real trigger for the economy, investors' interest in tech companies has returned. After the surprise Infosys sprung on the markets in Q1, it has come to terms with the divergent growth trajectories of the different companies. The renewed optimism is reflected in the BSE IT Index, which has gained seven per cent in the last one month.
Analysts say the market has decided to look beyond Infosys. Companies which have not faced internal revamps and have strengthened go-to-market strategies will see better growth than those coping with internal and external challenges.
The relative performance of the large tech firms might differ, but there’s no denying the structural slowdown in growth. The top four tech companies have seen dollar revenue CAGR of 35 per cent over FY02-06. This fell to 25 per cent over FY07-10 and 17 per cent over FY11-13. While a large part of the slowdown is structural, client-specific issues and internal revamp have affected the performance of Infosys and Wipro.
Though the macro-economic situation continues to be a challenge even in Q2, there are some signs of improvement. Citi says recent data on consumption/employment (in the US) have been positive though, the trends have been fairly volatile. Only if the uptick sustains, the IT firms would benefit.
Analysts say the second quarter is traditionally strong. This time it won’t be any different. Companies say they are seeing better traction in deal closures. Infosys has told analysts it has closed two large deals of $200 million and $125 million each. Despite this, they say Infosys has not given any indication of improvement in the business outlook. So, the company may be able to meet the five per cent revenue guidance in FY13, but is unlikely to spring any positive surprise.
The other concern from the June quarter numbers was the pressure on pricing. Realisations of most companies saw a fall of 0.2 per cent in constant currency in Q1. Companies have conveyed this is not a secular trend and there have been one-off renegotiations. Citi believes pricing tends to bounce back after slowdown once demand picks up. Going by management commentaries, IIFL feels companies such as HCL Tech, Mahindra Satyam and Wipro have reasonably good growth prospects. From a valuation point of view too these companies are relatively more attractive.
