With the Cognizant results released on 7’th August we now
have the results of all the Top 5 Indian IT service firms for the quarter
ending June 30, 2014 released to the world. Apologies for the delay
in sending out this communique as I am travelling outside India on business. For the benefit of those of you
who have read my earlier version of the communique that was sent after the 4
firms other than Cognizant released their results, I am marking the changes in YELLOW.
With results of the Top 5 Indian IT firms for the quarter
ending June 30, 2014 released to the world, we have adequate data
points for a comprehensive comparative analysis and hence again a time for
drawing inspiration from the winners and reflecting on the learnings one can
pick up from the rest. The idea of this analysis is to present an ‘apples to
apples’ comparison view to the readers unlike the view that comes from the
media which is some time not an accurate representation of the reality on
the ground as they mix up numbers in INR with that of USD and that of GAAP with
IFRS. My analysis is based on the USD numbers as per IFRS norms based on
the balance sheets released by the Top 4 Indian IT firms. Thanks to your
constant encouragement, I have been sending out these communiques for over 10
quarters now without skipping even one quarter.
I had written in the communique that I sent last quarter
that there seems to be a trend where in the Top IT firms are releasing their
results within the first 2 weeks after the quarter ends. This excitement was
however short lived as all the firms broke the trend this quarter and took more
time to come out with their results. The gap between Infosys releasing its
results and the other Top firms releasing its results further increased to an
average of 2 weeks. Forbes came out with its list of Top 2000 Global firms a few weeks ago and four of the
top 5 Indian IT firms (TCS, Cognizant, Infosys and Wipro) figure in this list.
In terms of market capitalization TCS has far out performed the rest of the
pack by touching a value that exceeds the market capitalization of the
next 3 firms put together. The market capitalization value of the Top firms is
as follows: TCS[84 B USD], Infosys[31 B USD], Cognizant[28 B USD], Wipro[23 B USD] and HCL[18 B
USD]. Though these numbers are small compared to IBM at 194 B USD, they do
compare well with Accenture at 51 B USD. Now let’s dive deeper into the
qualitative and quantitative analysis of the Top 4 IT firms.
Cognizant has had a rather muted
growth rate for quarter ending June 30, 2014 with the QoQ growth at 3.9% which
is however better than its performance in the last few quarters which had sub
3% QoQ growth rates. The growth rate for FY15 has also been reduced by 2
percentage points compared to its earlier projections of 16% growth in FY15. So
it appears the current quarter is an aberration in terms of having ~4% QoQ
growth rates and the remaining quarters will follow the 3-3.5% growth rates in
line with the trend in the previous quarters which is not very encouraging.
However its operating margins as a % of revenues are improving to a 19-20%
range in the recent quarters up from the 17-18% levels last year. Also it is
the weakest amongst the Indian players in terms of the Geo risk diversification
with its exposure to North American market at 77% of its total revenues. While it is too early to say that it has lost
its mojo vis. a vis. the industry leader TCS, one needs to keenly watch this
company for the next 4 quarters to get a feeler of its ability to handle the
complex delivery related issues arising out steep growth rates which it has
been having over the last few years and its ability to streamline the
operational agility of the firm and also introduce the right controls and
processes needed for a company of its size. However the best thing that
happened this quarter is that, it has crossed the 2.5 B USD per quarter revenue
run rate which catapults it to the 10 B USD per year company in terms of
revenues.
Infosys growth
rate might be showing signs of recovery in this quarter and we could perhaps
expect a rebound with a new CEO at the helm. The new CEO clearly told the media
that his priority was to bring growth back at Infosys by leveraging Innovation
and Cutting Edge technologies for adding value to its clients. Infosys grew QoQ
for in Q1, FY15 by 2% which is not bad on a standalone basis but does not look
very pretty compared to its competition. The operating margins as a
percentage of revenues which had hit a rock bottom of 21.8% last year has
rebounded to 25-26% in the last 3 quarters (including the current one) which is
a clear sign of success of the firm’s cost optimization strategies. However the
YoY growth for Q1, FY15 compared to Q1, FY14 was at 7.1% which means that the
firm must accelerate over the next 3 quarters for ending FY15 with a decent
growth in line with the 13-15% industry growth rate predicted by NASSCOM. The
results for Q1,FY15 are however in line with FY15 growth guidance given by
Infosys which is 7-9%. The overall employees today stand at 161,000 and overall
utilization has increased to 75% (80% excluding trainees) at the end of Q1,
FY15 up from 70% levels last year. Infosys has a client base of 910 active
clients today with a net addition of 61 clients in this quarter alone.
TCS has had a
superb quarter which over shadowed all its accomplishments over the last 8
quarters. TCS had a phenomenal growth of 5.5% QoQ during Q1, FY15 which
beat all its growth rates in the last 8 quarters. TCS clocked a whopping
3.7 B USD in revenues this quarter which clearly places it in a different
league compared to the other Indian firms. TCS continues to stick to its core
philosophy of ‘high growth with high profitability’ and has taken its
profitability to ~30% levels in FY14. However its CEO went on record saying
that they will be content with 25-26% operating margins and they want to plough
back the rest as investments that fuel future growth and the same philosophy
seems to have been already put into action with the current quarter operating
margins at 26.3%. The guidance for FY15 seems very positive and the firm
is very confident of outperforming its act in FY14. I will not be surprised if
TCS touches 20% revenue growth in FY15 going by its acceleration and its
renewed focus on making investments to fuel growth. They seem to be taking a
leaf out of Cognizant’s book of high growth fueled by investments and topping
it up with the TCS core competency of yielding industry leading operating
margins. The overall employee count has crossed the magic number
of 300,000 last quarter and its overall utilization was 80% (85%
excluding trainees) this quarter.
Wipro is becoming
a mystery as there is no specific indicative pattern that one can see over the
quarters and its performance is showing fluctuations from time to time. This
quarter (Q1, FY15) was a bad one for Wipro with a mere 1.2% QoQ growth with the
saving grace being that the YoY growth is 9.6%. While it appeared very good
with its Operating margins at 24.5% in the last quarter, it does not look as
rosy with a drop In Operating Margins this quarter to 22.8%. Wipro is one
company that is making all the right strategic moves and seamlessly translating
them to action as well. Keeping this in view the not so rosy performance
and a lack of a clear visibility on whether it is out of the woods or not
is indeed a mystery. It has a total of 1022 customers today with a net addition
of 31 customers in the current quarter. The year FY15 will be an interesting
year for Wipro as it will be a make or break year for this veteran Indian IT
firm. Wipro has 148,000 employees on its rolls and its utilization stands at
69%.
HCL is
probably the only company which has become very predictive in terms of its
quarterly performance and is indeed a very steady and reliable firm in terms of
its growth. It has been showing a steady growth of 3-4% over the last several
quarters. HCL has grown by 3.4% QoQ in Q1, FY15 which is in tune with its historical
trend. And as I mentioned in one of my earlier communiques this will eventually
become the norm for the Indian IT services industry very akin to the much
talked about “Hindu rate of growth”. HCL has shown a steep increase in its
operating profits as a % of its revenue from ~15% levels 8 quarters ago to ~25%
levels today which is a very significant accomplishment. HCL has been growing
at a CAGR of 15% over the last 3 years and at the same time its Operating
margins are growing at a CAGR of a whopping 40% over the last 3 years.
The firm has 90,000 employees with an utilization of 84%. HCL has crossed
5 B USD in terms of its annual run rate in the year ending March 30, 2014. This
will give it further access to the larger deals which in turn will further fuel
its growth.
RESULTS FOR QUARTER ENDING JUNE 30, 2014:
The summary of the
Q1, FY15 comparative analysis for Infosys, Cognizant TCS, Wipro and HCL is as
follows:
1.
TCS leads in terms of QoQ Revenue growth at 5.5% with
Cognizant following at 3.9%, HCL at 3.4%, Infosys at 2% and Wipro trailing at
1.2%
2.
TCS leads in YoY
Revenue growth at 16.7% with Cognizant
following at 16.5%, HCL at 14.6%, Wipro at 9.6% and Infosys trailing at 7.1%
3.
CTS leads in terms of QoQ Operating Profits growth at
6.1%, with HCL at 1.7%, Infosys at 0.4%,
TCS at -4.8% and Wipro trailing at -5.9%
4.
HCL leads in terms of YoY Operating Profits growth at
33.2% with Wipro following at 24.9%,
Cognizant at 14.3%, Infosys at 14.5% and
TCS trailing at 13.6%
5.
TCS leads in terms of Operating Profits as a % of
revenues at 26.3% with Infosys following at 25.1%, HCL at 24.2%, Wipro at 22.8%
and Cognizant trailing at 19.4%
6.
Cognizant leads in terms of SG&A expenses as a % of
revenues at 19.2% with TCS following at 18.3%, Infosys at 11.9% and HCL
trailing at 11.8%
Following is a
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)
|
2133
|
3694
|
1740.2
|
1406.9
|
2517.1
|
|
QoQ Growth
|
2.0%
|
5.5%
|
1.2%
|
3.4%
|
3.9%
|
|
YoY Growth
|
7.1%
|
16.7%
|
9.6%
|
14.6%
|
16.5%
|
|
Q1 Operating
Profits(M USD)
|
536
|
972
|
397
|
340.7
|
487.9
|
|
QoQ Growth
|
0.4%
|
-4.8%
|
-5.9%
|
1.7%
|
6.1%
|
|
YoY Growth
|
14.5%
|
13.6%
|
24.9%
|
33.2%
|
14.3%
|
|
As % of Revenues
|
25.1%
|
26.3%
|
22.8%
|
24.2%
|
19.4%
|
|
Q1 Net
Profits(M USD)
|
482
|
845
|
NA
|
305.4
|
371.91
|
|
QoQ Growth
|
-1.0%
|
-1.9%
|
NA
|
15.7%
|
6.6%
|
|
YoY Growth
|
15.3%
|
20.5%
|
NA
|
44.3%
|
23.8%
|
|
As % of Revenues
|
22.6%
|
22.9%
|
NA
|
21.7%
|
14.8%
|
|
Q1 SG&A
Expenses
|
253
|
677
|
NA
|
166
|
482.9
|
|
As % of Revenues
|
11.9%
|
18.3%
|
NA
|
11.8%
|
19.2%
|
*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 feedback and I will
really appreciate comments and suggestions…
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 works for
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