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 Wipro results hot from the oven, we now have the quarterly results for 3 of 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.
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 performance analysis for Infosys, TCS and Wipro are as follows:
Q1, FY14
| |||
Parameter
|
Infosys
|
TCS
|
Wipro
|
Q1 Revenues(M USD)
|
1991
|
3165
|
1588.3
|
QoQ Growth
|
2.7%
|
4.1%
|
0.2%
|
YoY Growth
|
13.6%
|
16.0%
|
4.9%
|
Q1 Operating Profits(M USD)
|
468
|
856
|
318
|
QoQ Growth
|
2.4%
|
6.2%
|
-0.8%
|
YoY Growth
|
-4.3%
|
14.1%
|
-0.1%
|
As % of Revenues
|
23.5%
|
27.0%
|
20.0%
|
Q1 Net Profits(M USD)
|
418
|
668
|
NA
|
QoQ Growth
|
-5.9%
|
0.8%
|
NA
|
YoY Growth
|
0.5%
|
10.6%
|
NA
|
As % of Revenues
|
21.0%
|
21.1%
|
NA
|
Q1 SG&A Expenses
|
227
|
608
|
NA
|
As % of Revenues
|
11.4%
|
19.2%
|
NA
|
*Wipro does not give P&L for Global IT services separately. There is a single P&L for Wipro Limited
I will be back with more updates and competitive analysis once HCL and Cognizant announces their results in the first week of August, 2013.
Please do feel free to post in your valuable feedback/comments on my analysis…
Note: The views expressed in the article above are purely the personal views of the author and have nothing to do with the firm he is employed in
