The bad times for India’s export oriented software leaders appear to have troughed out, going by the second quarter results of market leaders TCS and Infosys, and also the sentiments expressed by their chief executives. According to the sequential quarter-on-quarter figures which help identify inflection points, TCS’s consolidated topline growth rate has risen very marginally after falling over two consecutive quarters. As opposed to this, the performance of its bottomline, measured by its net margin, has been spectacular. After falling for the previous two quarters, it has improved spectacularly, by as much as four percentage points, to reach 22 per cent, thus going back to 2007-08 levels. Infosys, after recording a fall, in absolute terms, in its consolidated topline in the previous two quarters, has recorded a marginal gain. On the other hand, its net margin, which has never fallen sharply, remains steady at 27 per cent plus.
Infosys CEO S Gopalakrishnan has very clearly indicated that the business climate has improved in the reporting quarter. Though the firm’s numbers have been partly influenced by the positive impact of currency fluctuations, rise in volumes, enabled by increased demand in offshoring from the financial services sector, has played a key role in the return of better times. The onset of the financial crisis last year led to a virtual seizure in spending decisions, without any idea as to what shape IT budgets would look by the end of the financial year (2009-10). Clients are now again returning to spending, though on a selective basis, with an eye on preparing for normal times at the end of the recession. As a result, Infosys has also raised its hiring target for the current year. While the sentiment in Infosys is of slow and steady recovery, TCS leaders have used superlative terms to describe their performance. Newly appointed CEO N Chandrasekaran has spoken of a “sterling performance”, while also endorsing the view that market conditions have improved. For TCS, a strong volume growth of 5 per cent was enabled by good performance in Europe and Asia Pacific as well as stability returning to the financial sector on which it relies significantly. This, plus its larger presence, in relation to its competitors, in the rapidly growing Indian market indicated that it is ahead of them in derisking its business.
As for the future, both the firms have cautioned that the recovery or bottoming out in the last quarter notwithstanding, the industry is far from returning to the halcyon pre-recession days. Infosys has upped its guidance for the rest of the year even as it has indicated a dip in the current quarter. It is also important not to equate the overall performance of the industry with those of the market leaders, as the return of life in IT budgets has also been accompanied by vendor consolidation. This is bad news for medium-sized IT firms whose numbers are not in league with those of the leaders. The good news is that there is a move in the industry to raise onshore hiring. This implies that it has not given up its quest to acquire industry-specific and consulting expertise without which it cannot go up the value chain. Overall, the ability of TCS, despite its size, to surprise remains, as does Infosys’s reputation of being a steamroller charting a steady course, come what may.
