By Manik K. Malakar
The Information Technology sector in India has been in the doldrums over the past few quarters and this is understandable since the sector derives a substantial part of its income from foreign countries. Western economies have been hit by one fiscal crisis after another and this in turn had hurt the sector. But experts and industry bodies now opine that things may be turning and the sector could see good times, going forward.
Industry body NASSCOM too is positive on the prospects of the sector. For FY 12-13, it expects the exports revenues to grow by 11-14% and domestic revenues to have a higher growth rate at 13-16%.
“I believe that FY 13 will be good for the Indian IT industry,” says Uday Narayan Dubey VP, Research & Institution Business, R K Global. “The industry has gone through a tough phase, but the situation is improving.” And it is the global recovery, however tentative it may be that is the driver for the sector. European countries are increasing spending and this in turn is boosting liquidity and could spur growth.
And the performance of India’s IT companies, analysts opine supports this premises. “After a see-saw performance in H1 FY12 (First half Fiscal 12 of the April to September period) Q3, FY12 performance of Tier-I Indian IT services have been in-line with expectation,” says Shashi Bhusan of Prabhudas Lilladher. The Tier – I companies would be TCS, Infosys, Wipro and HCL Tech.
However, there are some factors that IT companies will have to confront. While new clients have come in, top clients have been a ‘drag’ for the Tier-I companies according to Bhusan. Also on a global scale the results of the global IT companies has been moderate.
So what have been the factors that have contributed to the IT growth and good performance so far? The rupee has depreciated strongly against the dollar in the past few months and this has benefited the IT industry. This along with operational efficiency has boosted margin expansion by 175 basis points on a quarter-on-quarter basis. Revenue growth in terms of rupees has been 12.7% on a quarter-on-quarter basis and 2.6% in dollar terms.
From the HR point of view, lateral hiring was at the same level as the last quarter, and employees grew by 4% on a quarter-on-quarter basis. In sync with volume growth in the Indian IT industry. But there were some negatives for the Top 4 companies as well. On a quarter-on-quarter basis the Top 10 clients grew by just 0.9%, the 5th consecutive quarter of slower than overall growth. Similarly deal pipeline continues to be slow.
However, the slowdown must be viewed in perspective. “OND (October, November, December) quarter is typically a softer quarter in terms of sequential volume growth, largely due to lower billable days and planned shutdown in Hi-tech and manufacturing industries, aka Furlough,” says analyst Pratik Gandhi of IDBI Capital. Gandhi expects a 2.4 - 3.5% volume growth for the Big-4 IT companies versus 4 - 6.2% in the previous quarter.
So how does the IT sector look at going forward and what are the cues that it will have to watch out for? “The BFSI segment which was hurt the most is likely to recover,” informs Dubey. It may be noted that the BFSI segment is one of the main contributors of IT spend. Since some of the Western economies are in the recovery mode, the BFSI segment is expected to benefit and this in turn will have a spill-over benefit on the IT segment. And while the environment is expected to improve, there will be pressure points on margins too. The deal pipeline is expected to improve. “We expect EBITDA margin to retreat towards mean or approximately 150-250bps (basis point or one/hundredth of a percentage point) erosion,” says Bhusan. “Volumes will be there but pricing will be a key issue,” states Uday Narayan Dubey of R K Global.
Then there is the rupee versus dollar related IT link. Says Abhishek Shindadkar and Aishwariya KPL, ICICI Securities, “Depending on the operating model, every 100 bps depreciation in the rupee yields a 25-40 bps of operating margin relief. Inter-quarter the average rupee has depreciated 11.1% against the dollar and suggests a likely operating margin benefit of 275-440 bps for Tier-I companies.
As regards the investment merits of the sector, Shashi Bhusan of Prabhudas Lilladher says “We reiterate our ‘Buy’ on HCL Tech and Infosys and an ‘Accumulate’ on TCS and Wipro, with a target price of Rs. 530, Rs. 3,080, Rs. 1,230 and Rs. 460, respectively.” Uday Narayan Dubey of R K Global has a Hold on Infosys and TCS and a Buy on Wipro and HCL Tech.