Indian IT sector back in business

After an unprecedented 18 months characterised by single-digit revenue growth, all three big Indian offshorers – Tata Consultancy Services, Infosys and Wipro – returned to double figures in the three months ending 30th June 2010.
TCS and Infosys both increased revenue by 21%, to $1.8 billion and $1.4 billion respectively, while Wipro’s IT services division grew revenue by 14% year-on-year to $1.2 billion.

But in terms of headcount growth – a measure of a company’s predicted demand – Wipro led the pack. The company’s IT services division grew by 4,854 employees to 112,925, a 4.5% increase.

“We added the highest number of billable employees ever,” said company chairman Azim Premji. Wipro is seeing a “strong demand environment across our industry verticals despite macro challenges,” he explained. TCS and Infosys, meanwhile, added 3,721 (0.9%) and 1,026 (2%) employees respectively.

It is a crude measure for a number of reasons, but Infosys leads the big three in terms of revenue per employee during the quarter, with $11,827 for every worker. This compares to $10,959 at TCS and $10,493 at Wipro’s IT services unit.

Each company reported profit slightly differently, so a direct comparison is not possible. Wipro’s IT services division reported earnings before interest and tax of $291 million, up 26% year-on-year. TCS reported profit after tax of $403 million, up $29.3%. Infosys’s net income after tax was $326 million, an increase of just 4.2%.

When it came to the companies’ appraisal of their own performances, TCS was the most confident. “This has been a quarter of complete outperformance,” said CEO N Chandrasekaran. “While we remain alert about changing macro-dynamics in many markets, our customer-centric business model is very relevant and helps us participate in the ongoing recovery.”

Infosys CEO S Gopalakrishnan sounded more cautious in his prognosis. “The challenge for the industry is to enhance the investment to grow the business, given the uncertainty in the environment,” he reflected.

Meanwhile, the company’s CFO V Balakrishnan warned of the potential impact of currency fluctuations on future performance. “The volatile currency environment is a concern for the industry,” he said.

Comparing the financial performance of the three giants of Indian IT is further complicated by the fact that Infosys and Wipro have adopted the International Financial Reporting Standards, but TCS has not.

When asked whether this made a material difference, a spokesperson for TCS added yet another complexity: “Wipro’s figures are not comparable with either TCS or Infosys because they show their [currency] hedging gains and losses in their top line.” Many Indian companies ‘hedge’ foreign currencies to protect themselves from currency fluctuations.

Closing the gap

Since Satyam’s catastrophic fall from grace in 2009, Cognizant has emerged as the fourth largest Indian IT supplier. The US-headquartered company, which operates delivery centres across the globe but mainly in India, is now threatening to overtake Wipro’s IT services division in size.

In revenue growth terms, Cognizant outstripped all of its rivals during the three months ending 30th June 2010. Revenues grew 42% year-on-year to $1.1 billion, taking the company above the billion-dollar mark for the first time.
This growth reflected a renewed willingness among customers to spend on technology, Cognizant CEO Francisco D’Souza told investment analysts in a conference call.

Demand was also boosted by customers undergoing mergers or acquisitions. This was especially true in the UK market, D’Souza said, where revenue grew 22% year-on-year.

Cognizant grew its total headcount by around 3,000 employees during the quarter, taking the total to approximately 88,700. Its revenue per employee was therefore roughly $12,500. The company’s net income for the quarter was $172 million, up 21% from the year before.

That performance rather overshadowed another contender for the number four slot, HCL Technologies. The company’s revenue grew by a respectable 22% during the quarter to $738 million, but net income was comparatively sluggish, growing just 7% year-on-year to $74 million.

HCL added more employees during the quarter than any of the other top-flight Indian outsourcers, with 6,428 net additions taking its total headcount to 64,500. That meant its revenue per employee was $11,400.

Like all of the Indian outsourcers, HCL predicted that European governments will spend less on IT in the immediate future than they have in the past. “The total amount of spending by European governments will decline over the
next three years, there is no doubt about that,” Steve Cardell, the company’s head of enterprise applications, told investment analysts. But he added that the company was confident it could secure a growing proportion of that shrinking spend.

“As governments look to reduce cost, they are looking for partners to be more creative; that presents an opportunity and could potentially increase [the] market for us,” he said.

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

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