With Cognizant results fresh
from the oven and HCL results from last week, the comparative analysis of all
the Top 5 IT firms is given below… The changes over my earlier version
comparing Top 3 firms have been highlighted in YELLOW.
Unlike
the previous quarters when the Top 4 IT companies would come out with their
quarterly results within a week of Infosys announcing its results, this time we
have seen delays in these firms announcing their results. Only three firms
(Infosys, TCS, Wipro) amongst the Top 5 have announced their results so far and
we will see HCL announcing its results on 31’st July and CTS on 6’th August,
2013. Since I did not want to delay my quarterly bulletin further I will
present the phase one of my analysis today and phase two on 7’th August.
Every
quarter as a part of the competitive analysis, I usually reflect on the global
macro-economic trends across continents that impact the IT Services industry.
This time I have chosen to reflect on the economic conditions in India which is
the home to many of the Top IT services firms and the volatility of the
Indian economy will have a natural bearing on the performance of the IT
services firms. Today Indian economy is probably at the lowest point of the
trough in the last decade. The threat of a credit rating downgrade by firms
such as S&P looms large on this nation. Such a downgrade will move India
from “Investment” grade to “Junk” grade status and this in turn
will have a severe impact on the nation’s ability to attract foreign
investment. The Current Account Deficit (CAD) is at a low point of 4.8%, fiscal
deficit is around 5% and the growth rate of GDP is between 5%-5.5%. We
seem to have a “Triple 5” syndrome where in the key health indicators such as
CAD, Fiscal Deficit and GDP are hovering around 5%.
The
speculation that the US Fed might roll back stimulus has led to a surge in the
yield of the treasury bonds in US and this has led to a flight of capital from
the emerging markets back home to the US. India has been hugely impacted by the
flight of foreign capital which has led to a weakening of its currency
and the Indian Rupee is at a life time high in terms of its exchange rate vis.
a vis. the US $. The weakening of the Indian Rupee will further increase its
Current Account Deficit as imports become more expensive and might lead to an
Balance of Payments crisis in the coming quarters. This will have an impact on
the inflation levels in the country which are already high and together with
the Indian Fed (RBI) squeezing out liquidity by increasing the Cash Reserve
Ratio and rising Interest Rates, will further increase the imbalance between
the rich and the poor. While a number of corporates are putting pressure on the
Indian Fed (RBI) to take measures to ease money supply as we also have the
situation of lower growth rates in the economy which would further spiral
downwards unless the money supply increases.
I
personally believe that what India needs is an “inclusive economy” and this
will not happen unless the inflation is brought under control and hence RBI is
taking the right steps which will prove prudent in the long run. The absence of
alternate investment avenues in India where the stock market, bonds and real
estate have lost the lure has led to a situation where there is “Gold Rush” and
the vast majority of people have begun to divert their savings into Gold which
is the safest bet. This has also had an adverse impact on the Trade
deficit of the country where 50% of the imports are that of Gold. The Indian economy
will rebound once the Inflation is brought under control and domestic
consumption picks up, the investments from abroad are channeled via easy
clearances to FDI and preventing retrospective laws from being promulgated, the
shale gas potential in India is exploited and the Oil imports which account for
huge import costs are pared down, stock markets get mature where fundamentals
reign supreme than sentiments thus giving alternate investment avenues.
With Cognizant results hot from the
oven, we now have the quarterly results for the Top 5 Indian IT firms for the
quarter ending June 30, 2013 (Q1, FY14). The numbers in the media are sometimes
misleading as they mix up the INR numbers and USD numbers and portray the data
the way they want to. Like always my comparative analysis is an ‘apples to
apples’ comparison based on the IFRS USD numbers so that the Top firms are
compared using the same yard stick.
Cognizant has had a
spectacular quarter with a QoQ growth of a whopping 7% for the quarter ending
June 30, 2013. Its YoY growth vis. a vis. the same quarter last year is also
very high at 20.4%. The quarterly growth forecast for Q2 is 4.1% and the annual
growth forecast for FY14 is 20%. This is the best performance in terms of
growth across all the Top 5 firms and there is no other firm in the vicinity.
The Operating Profits as a % of revenues has also increased to 19.7% from the
earlier levels of ~18%. This is a good 2% addition to its bottom-line which
indicates that firm is making serious efforts to increase its profitability. At
the same time the firm’s SG&A expenses have increased to 19.5% of its
revenues from the ~19% levels earlier indicating that its top line and bottom
line growth is accompanied by continued investments in sales and marketing. BFSI
is the biggest vertical at Cognizant which contributes 42.1% of its revenues
followed by Healthcare vertical at 25.1%
HCL has maintained the constant growth of
3.1% QoQ for the quarter ending June 30, 2013 like in the previous quarters.
HCL seems to have stabilized at a healthy growth rate of 3-3.5% over the last
several quarters. Like always a good portion of its revenues comes from the
‘Infrastructure Management’ service line which contributed 32% if its overall
revenues. In terms of the major verticals, Manufacturing contributes 29% of
HCL’s total revenues followed by BFSI at 25%. One striking differentiator for
HCL is that its volume growth is a mere 1.4% compared to its revenue growth of
3.1% which indicates a lot of non-linear growth. This is in contrast to the
situation one finds amongst the remaining top IT firms making HCL one of the
pioneers in successful execution of Non Linear growth models. HCL closed this
quarter with 85,500 employees.
TCS has shown a robust QoQ growth of 4.1% and YoY growth of 16%
for the quarter ending June 30, 2013. TCS has been accelerating despite its
huge size and has become the trend setter in terms of both the revenue growth
as well as profitability. It has managed to up its Operating Profits as a % of
revenues to 27%. TCS is going strong on its investments in the sales and
marketing area which can be seen by its high SG&A hovering around 20%
consistently over the quarters. It has closed the quarter with a head count of
around 278,000 employees together with an overall utilization of 73%. Its
employee cost is surprisingly low at 39% of its revenues. Latin America[2.4%]
and India[7.6%] together accounted for 10% of the TCS revenues in Q1. BFSI is
its biggest vertical with a share of 43% followed by Retail at 14% and Telecom at
9.5%. The volume growth was a whopping 6.1% this quarter.
Wipro had given a guidance of -0.1 to 1.3% growth in revenues
for Q1, FY14 and is closer to the lower end of its guidance with a growth of
0.2% QoQ in revenues for the quarter ending June 30, 2013. This again puts in
question the efficacies of the Wipro’s turnaround strategy which does not seem
to be yielding enough data points that point towards a revival. However Wipro
has given a guidance of 2-4% growth for Q2, FY14 and this might give some hope
to shareholders of Wipro. Wipro’s Operating Profits as a % of revenues are down
to 20% this quarter from the numbers closer to 21% in the earlier quarters.
Wipro’s largest vertical is BFSI which contributes 27% of its revenues followed
by Manufacturing at 19% and Energy and Utilities at 16%. The employee count for
Q1 closed at around 147,000.
Infosys clocked 1991 M USD in revenues for the quarter ending
June 30, 2013 with a QoQ growth of 2.7% and YoY growth of 13.6%. Infosys
Operating Profits as a % of revenues is at 23.5% and the SG&A as a %
of revenues is at 11.4%. Infosys has been showing a sequential quarter on
quarter positive growth for the last 4 quarters. Q2 FY13, Q3 FY13 , Q4 FY13 and
Q1 FY14 did show a sequential growth of 2.6%, 6.3%, 1.4% and 2.7% QoQ
respectively. While one could debate that the growth was slower than that of
the competition, the fact remains that Infosys is still growing QoQ every
quarter since last 4 quarters. Infosys had a volume growth of 4.1% in this
quarter signaling severe pricing pressures as the revenue growth was only 2.7%.
The employee count for Infosys at the end of Q1 was at around 157,000 .
QUARTERLY RESULTS:
The summary of the Q1, FY14 comparative analysis for Infosys, TCS and
Wipro are as follows:
1.
CTS leads in terms of QoQ Revenue growth at 7% with TCS
following at 4.1%, HCL at 3.1%, Infosys at 2.7% and Wipro trailing at 0.2%
2.
CTS leads in YoY Revenue growth at 20.4% with TCS
following at 16%, HCL at 13.7%, Infosys at 13.6% and Wipro trailing at
4.9%
3.
CTS leads in terms of QoQ Operating Profits growth
at 16.6%, with HCL following at 9.2%, TCS at 6.2%, Infosys at 2.4% and Wipro
trailing at -0.8%
4.
CTS leads in terms of YoY Operating Profits growth at
28.6% with HCL following at 23.3%, TCS at 14.1%, Wipro at -0.1% and
Infosys trailing at -4.3%
5.
TCS leads in terms of Operating Profits as a % of
revenues at 27% with Infosys following at 23.5%, HCL at 21%, Wipro at 20% and
Cognizant trailing at 19.7%
6.
CTS leads in terms of SG&A expenses as a % of
revenues at 19.5% with TCS following at 19.2%, HCL at 13.3% and Infosys
trailing at 11.4%
Following is the chart showing the comparative analysis of these top
firms on various financial parameters:
Q1, FY14
|
|
|
|
|
|
Parameter
|
Infosys
|
TCS
|
Wipro
|
HCL
|
CTS
|
Q1 Revenues(M USD)
|
1991
|
3165
|
1588.3
|
1227.6
|
2161.2
|
QoQ
Growth
|
2.7%
|
4.1%
|
0.2%
|
3.1%
|
7.0%
|
YoY
Growth
|
13.6%
|
16.0%
|
4.9%
|
13.7%
|
20.4%
|
Q1 Operating Profits(M USD)
|
468
|
856
|
318
|
258.3
|
426.8
|
QoQ
Growth
|
2.4%
|
6.2%
|
-0.8%
|
9.2%
|
16.6%
|
YoY
Growth
|
-4.3%
|
14.1%
|
-0.1%
|
23.3%
|
28.6%
|
As
% of Revenues
|
23.5%
|
27.0%
|
20.0%
|
21.0%
|
19.7%
|
Q1 Net Profits(M USD)
|
418
|
668
|
NA*
|
213.8
|
300.4
|
QoQ
Growth
|
-5.9%
|
0.8%
|
NA*
|
10.9%
|
5.7%
|
YoY
Growth
|
0.5%
|
10.6%
|
NA*
|
37.2%
|
19.3%
|
As
% of Revenues
|
21.0%
|
21.1%
|
NA*
|
17.4%
|
13.9%
|
Q1 SG&A Expenses
|
227
|
608
|
NA*
|
163
|
420.5
|
As
% of Revenues
|
11.4%
|
19.2%
|
NA*
|
13.3%
|
19.5%
|
*Wipro does not give
P&L for Global IT services separately. There is a single P&L for Wipro
Limited
Please do feel free to send in
your valuable feedback/comments on my analysis…
Thanks and Best Regards,
Deepak
Note: The
views expressed in the article above are purely the personal views of the
author and have nothing to do with firm he works for
