Business Standard

First-quarter blues

Hard times for software leaders

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Business Standard New Delhi

There are a lot of similarities in the 2011-12 first-quarter results of the two software leaders, Tata Consultancy Services (TCS) and Infosys. Both have grown their topline at a slower pace than in the previous sequential quarter. The bottomlines of both have actually dipped, again sequentially, leading to a fall in net margins. This is not surprising since traditionally, the first quarter of a new financial year does not match the performance of the previous quarter, the last quarter of the previous financial year — a period during which every company tries to put in a stepped-up performance to boost the results of the year as a whole. Within this scenario, the net margins of Infosys in relation to TCS have actually recovered, reversing the position in the previous quarter when it fell behind TCS for the first time. Yet the infosys results have disappointed the markets, which consider the TCS results better than expected. One explanation being given is that since Infosys always under-promises and over-performs, the fact that it met its guidelines is no big deal. The letdown was over insufficient over-delivery!

 

While this may not be very rational, the environment in which the firms and the sector are operating and their responses and strategies are easy to understand and agree with. The developed economies, where most of the clients of the leaders reside, remain mired in an extremely anaemic recovery. This is playing havoc with jobs, keeping unemployment rates sky-high and creating a groundswell of opinion against the import of skilled workers. Part of the depressed scenario for offshore vendors results from their travails in securing visas for their workers, particularly for the US, since they rely heavily on sending their boys from home to take care of on-site delivery. The guidelines for issuing visas remain the same but rejections have shot up. The other negative for the companies is the outlook on prices. Contrary to the last year when there was some recovery, they are flat this year. This explains the fall in margins when sequentially volumes have gone up for both firms.

Unsurprisingly, there is absolutely no note of optimism in the utterances of the two firms’ leaders during the announcement of results. TCS finds the macro environment volatile and uncertainty a reality. Infosys simply talks about its internal re-organisation to become more domain-focused. Software leaders are progressing well on the way to becoming more integrated partners of their clients as they seek to transform themselves into more efficient operations. But the vendors are faced with a domestic skills shortage, which is exerting an upward pressure on staff costs. In fact, over time the cost of skills will become a bigger issue as vendors seek to go up the value chain. In this scenario, firms are increasing their onshore recruitment. This will make them more international in character. It will also bring their costs more in line with global incumbents’ and partly take away the emerging players’ traditional advantage. To stay in the game they will have to remain one step ahead in the catch-up process by improving productivity faster than cost rises.

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First Published: Jul 22 2011 | 12:06 AM IST

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