Tech fest

Volume growth was rather robust in technology firms, despite currency blues

The performance of technology companies (Infosys, TCS, HCL Tech and Wipro) has been rather impressive in the third quarter, given the backdrop of the appreciating rupee and fewer working days in the key western markets owing to the holiday season in December.

So, even if the appreciating rupee has impacted top line growth (in rupee terms) and operating profit margin, volume growth has been rather robust.

Volume growth has been robust at all the companies. At HCL Tech, it was 7 per cent q-o-q, TCS' volumes went up 7.9 per cent, while at Wipro and Infosys, volumes grew 9.6 per cent and 8.5 per cent respectively.

Billing rates have been up for most companies, with Infosys' rates rising 4.3 per cent and TCS' going up 2.5 per cent. What is more reassuring is that renewal contracts and new contracts are earning 3-5 per cent higher rates.

In case of HCL Tech, higher billing rate has resulted in 140 basis points improvement in the operating margin.

Companies are spending less on selling, general and administrative (SG&A) expenses as they seem to be benefiting from scale advantages and lesser sales activities in the second half, say analysts.

TCS saw its SG&A, as a percentage of revenues, fall by 60 basis points sequentially, while in the case of Infosys it came down by 40 basis points.

The relatively smaller HCL Tech saw its SG&A rise by 50 basis points owing to a global client meet in Agra during the quarter.

The appreciating rupee has eroded margins at all tech companies - Infosys (a fall of 200 basis points in operating profit margin), TCS (-170 basis points), Wipro (-60 basis points) and HCL Tech (-150 basis points).

The trend in utilisation rates was not as impressive though -utilisation (excluding trainees) at TCS fell 110 basis points q-o-q, while it was flat at Infosys. In case of HCL Tech, onsite utilisation improved by 300 basis points but offshore utilisation was 310 basis points lower.

The most heartening fact is that productivity has improved across companies, which has resulted in better operating margins at all the companies. If margins are down at Wipro, it is because of its onsite wage hike from November 1, which shaved off 180 basis points from the margin, along with the rupee appreciation.

Also, Wipro was the only company among the four to see lower attrition during the quarter. Attrition at TCS was up 20 basis points, while at Infosys it rose 60 basis points.

Larger clients are also becoming evident. HCL Tech added one $50 million (plus) and one $40 million client. TCS added five clients over $20 million during the quarter, and announced two $100-million deals and three $50 million accounts.

Wipro added four $20-million clients during the quarter. Wipro's recent acquisitions have also seen an improvement in margins and a reduction in the overall loss during the quarter.

Going forward, pricing is going to remain largely favourable as companies manage to increase billing rates for new clients and renewals.

Utilisation rates will improve as the large number of trainees that most of these companies have recruited in the past year become billable. The average deal size too is on the way up.

Thus, even if the rupee plays spoilsport, the operating environment for tech companies for the next quarter remains strong, and tech stocks should out-perform.