The Cognizant results are out fresh from the oven now and hence it is again time to re-look at the comparative analysis of the Top 5 Indian IT firms for the quarter ending 31’st December, 2012. I have updated the analysis that I had written earlier this quarter with the comparison of the key 4 Indian IT firms to now include COGNIZANT. I have marked the updated sections in PINK.
THE COMPARATIVE ANALYSIS
The global economy forecasts are not very positive for the first half of the calendar year 2013. The US economy with the “fiscal cliff” only fixed temporarily and with no imminent ‘surgical’ correction in sight due to the political compulsions does not augur well for the world’s economy. While the situation in US is not as bad as in Europe, the country seems to be making the same fiscal and monetary mistakes that the Euro zone did in the yester years. The Euro Crisis does not seem to show signs of fading away into the oblivion atleast in the next 12-18 months. However the Asia Pacific, Middle East and Latin American regions seem to be doing well compared to the developed nations. Australia is growing very well backed by its strong Mining industry and the Middle East is also expected to grow at 4% in terms of GDP in CY 2013. Latin America is showing similar growth trend as well. India and China together with Indonesia and Malaysia will be engines of growth in Asia. On the whole the global GDP is expected to grow at 3.4% YoY in 2013 and this is a good sign when compared to the 3% YoY growth in 2012.
IT firms will have to ride on the wave of increased IT spending in the emerging markets and rely on the ‘cost take out’ initiatives in the developed markets where the IT budgets will remain more or less unchanged over the last year. The key strategy that IT firms need to adopt is cutting the spend on support and maintenance projects by leveraging efficiencies such as re-use, accelerators and platforms and using these ‘savings’ for funding the transformational projects.
Cognizant had been doing consistently well over the last few quarters and has been showing a steady high growth. However for the quarter ending 31’st December 2012, Cognizant grew QoQ only by 3% in terms of revenues compared to a good 5.4% growth in the preceding quarter. This indicates a marked slowdown in the performance of the firm whose aggressive low margin strategies seem to be taking a toll on its ability to deliver consistently. The operating profit as a % of revenues at around 18-19% remains almost constant over the quarters. It appears as if its bottom-line is also under pressure if the halting of salary hikes and promotions for its employees for this FY are an indication.
TCS QoQ growth of 3.3% for Q3, FY13 was in line with the guidance of 3% but is lower than the last quarter QoQ growth of 4.6%. The growth has indeed slowed down at TCS in Q3. However on the margin front TCS is able to maintain its margins very well between 27-28% for the last few quarters. On the other hand, Infosys has been seeing margin erosion from 28% a few quarters ago to 26% last quarter and 25% in Q3. They further expect this to go down to 24% in Q4. This is certainly a change in the strategic direction at Infosys which has moved away from the industry leading margins strategy to a re-investment strategy which is useful in the long run.
HCL has shown a QoQ growth of 3.6% in Q3, FY13 vis. a vis. 3.2% QoQ growth in Q2, FY13. Despite the challenges in the market and the bad economy, HCL is accelerating and does not show signs of slowing down. It is leveraging its strengths in Hi-tech, Engineering and R&D verticals and specifically in Infrastructure space to boost its market share. The more interesting trend to note is that its operating profits have increased by a whopping 41.5% YoY in Q3, FY13 indicating that HCL is attempting to go up the value chain and improve its profitability.
Wipro has continued its trend of QoQ growth from Q2 and has posted a growth of 2.4% QoQ for the quarter ending December 31, 2012. The operating margins remains constant over the last several quarters at 20.8% but this does not mean much in today’s times when most IT companies manage to keep their operating margins intact by ‘adjusting’ the variable pay of their employees. However Wipro also seems to have bounced back as can be seen from its decent growth performance in the last 2 successive quarters after a few preceding quarters of de-growth.
Infosys has shown a QoQ growth rate of 4.2% for this quarter (Q3, FY13) which was much higher than that in the previous quarter (excl. Lodestone) and 6.3% growth QoQ (incl. Lodestone) in Q3, FY13. This has sent a clear signal to the market that Infosys has bounced back. Infosys had shown de-growth in Q4, FY12 and Q1, FY13. People in the market were keeping fingers crossed when it showed 2.6% growth QoQ in Q2, FY13 and were cautiously optimistic as they were not sure if this was a flash in the pan or if this growth trend would continue in the future quarters. A consistent and increasing growth trend in Q3 (even excluding Lodestone) certainly is a feather in the cap.
The summary of the performance analysis for Infosys, TCS, Cognizant, Wipro and HCL for the quarter ending December 31’st, 2012 are as follows:
1. Infosys leads in terms of QoQ Revenue growth at 6.3% with HCL following at 3.6%, TCS at 3.3%, CTS at 3% and Wipro trailing at 2.4%
2. CTS leads in YoY Revenue growth at 17.1%, with TCS following at 14%, HCL at 13% , Infosys at 5.8% and Wipro trailing at 4.8%
3. HCL leads in terms of QoQ Operating Profits growth at 6%, with TCS following at 5.4%, Infosys at 4%, Wipro at 2.9% and CTS trailing at 0.3%
4. HCL leads in terms of YoY Operating Profits growth at 41.5% with CTS following at 15.6%, TCS at 6.3%, Wipro at 4.8% and Infosys trailing at -12.3%
5. TCS leads in terms of Operating Profits as a % of revenues at 27.3% with Infosys closely following at 25.7%, Wipro at 20.8%, HCL at 19.8% and CTS trailing at 18.3%
6. CTS leads in terms of SG&A expenses as a % of revenues 19.7%, with TCS following at 19.1%, with HCL following 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:
Q3, FY13
| |||||
Parameter
|
Infosys
|
TCS
|
Wipro
|
HCL
|
CTS
|
Q3 Revenues(M USD)
|
1911
|
2948
|
1577.2
|
1154.3
|
1948.2
|
QoQ Growth
|
6.3%
|
3.3%
|
2.4%
|
3.6%
|
3.0%
|
YoY Growth
|
5.8%
|
14.0%
|
4.8%
|
13.0%
|
17.1%
|
Q3 Operating Profits(M USD)
|
491
|
804
|
328
|
229
|
356.2
|
QoQ Growth
|
4.0%
|
5.4%
|
2.9%
|
6.0%
|
0.3%
|
YoY Growth
|
-12.3%
|
6.3%
|
4.8%
|
41.5%
|
15.6%
|
As % of Revenues
|
25.7%
|
27.3%
|
20.8%
|
19.8%
|
18.3%
|
Q3 Net Profits(M USD)
|
434
|
652
|
NA*
|
177.5
|
278.8
|
QoQ Growth
|
0.7%
|
1.4%
|
NA*
|
9.6%
|
1.0%
|
YoY Growth
|
-5.2%
|
14.8%
|
NA*
|
59.1%
|
16.1%
|
As % of Revenues
|
22.7%
|
22.1%
|
NA*
|
15.4%
|
14.3%
|
SG&A Expenses
|
217
|
563
|
NA*
|
153
|
384
|
As % of Revenues
|
11.4%
|
19.1%
|
NA*
|
13.3%
|
19.7%
|
*Wipro does not give P&L for Global IT services separately. There is a single P&L for Wipro Limited
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