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Indian IT companies report better than expected results

Contributed by Nirmal Bang

By Nirmal Bang

New signs of recovery have brought some hope to the Indian Information Technology (IT) players, who were totally clueless about the short-term growth a while ago. Most Indian IT companies reported better than expected results. After reporting a marginal to negative growth rate for the previous two quarters, top-tier IT companies are back on the growth track in the September ’09 quarter. Many companies have also revised their full-year guidance upwards and look more confident about future business growth than they were in the previous quarter.

The results of many IT companies surprised analysts positively and their stocks outperformed the broader market indices in recent times. The BSE IT Index surged by around 30% compared to 5% rise in Sensex in the last four months.

The aggregate revenue of top 100 IT companies grew 5% sequentially and this is the highest growth rate seen in the last four quarters. Interestingly, this time the growth was led by rise in business volumes. For instance, Tata Consultancy Services, the country’s largest IT exporter, reported a 5% sequential growth in volumes, whereas Infosys Technologies reported a 2.3% volume growth. Many IT companies maintained that they do see improvement in business conditions of their clients and expect things to get better here onwards.

Employee costs, which account for more than half of the IT companies’ operating expenses, was also tightly controlled. A poor job market in the last one year, reduction in headcounts and cut down on employee benefits are some of the factors responsible for such low employee expenses. The impact of internal cost control measures was reflected in profitability numbers of Indian IT companies. The bottomline grew at a faster clip than the topline. The aggregate net profit of these 100 companies grew 9.4% sequentially and this growth rate is the highest in the last four quarters.

Though the aggregate performance of the sector has been impressive, it is interesting to see how companies with varied sizes have performed. To understand it better, we separated the data into three categories –– large, mid and small-sized companies. Surprisingly, the data shows that small-sized IT companies performed better than mid and large-sized IT companies in terms of net profit. The aggregate net profit of 75 small-sized IT companies increased by more than half from what it was in the previous quarter. On the other hand, the aggregate net profit of large and mid-sized companies rose by 5% and 12% respectively.

The revenue for small-sized IT companies, however, did not grow at a faster rate than the other two segments. One of the reasons for such disproportionate rise in bottom line of small-sized IT companies is their flexibility to reduce operating expenses significantly. Unlike bigger companies, small companies can do away with their operating expenses like employee costs and fixed costs like electricity, rents, etc more easily. This helped those companies to boost their profitability numbers in the September ’09 quarter.

However, operational improvement was seen across the three segments leading to margin expansion. While the aggregate operating margin of mid and large-sized companies expanded by 70 to 100 basis points, smallsized companies reported an expansion of around 500 basis points on a sequential basis.

Going forward, the companies expect their clients to come back to the negotiation table for new projects. They are also witnessing some reversal in demand from banking, financial services and insurance (BFSI) verticals, which usually account for around 30% to 50% of their revenue. All these factors gave more confidence to IT companies and many of them are beginning to hire more and more resources.

The performance of some top-tier IT companies is as mentioned below.

Tata Consultancy Services (TCS)
During the September ’09 quarter, TCS reported a topline growth of 3.2% sequentially, mainly attributed to 5% growth in volumes. Pricing and productivity, however, declined on a sequential basis. The result was better than expected and it further bolstered positive sentiments pertaining to the IT sector.

Infosys Technologies Ltd
IT bellwether Infosys Technologies recorded a 2.1% jump in its rupee-denominated revenue on a sequential basis. The volume rose by 2.3% mainly on account of a 3% increase in off-shore volumes. The company set a positive tone for the Indian IT sector by revising its FY10 guidance upwards. The result beat market estimates. The company has also indicated it would hire 2,000 more employees than what it did in the previous quarter.

Wipro Ltd
Wipro reported a 3.2% sequential growth in its dollardenominated revenue, which is marginally higher than expectations. Unlike its peers, the company reported a 1.5% decline in volumes but pricing grew sequentially. However, it delivered an impressive growth in bottomline with around 140 basis points expansion in its IT services operating margin. Overall, the result was not as impressive as that of its other peers.

HCL Technologies Ltd
It reported 4.2% sequential growth in revenue, backed by an impressive 2.7% volume growth. The management of the company, however, maintained a cautious outlook about the next two quarters’ growth. It could not manage its hedged position well and reported a forex loss of Rs 150 crore. This dragged down its net profit by 3.1% sequentially. Without forex loss, however, the bottomline grew at 12.3% sequentially.