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IT industry: Performance takeaways - Views on News from Equitymaster

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IT industry: Performance takeaways

Nov 12, 2009

Just over a year back Indian IT industry was accustomed to getting all 'A's in its performance report card growing at stellar rates of about 30% each year for nearly a decade. But the global economic tsunami which hit one and all disturbed India's sun-shine industry as well. The Indian IT industry which primarily works on the offshoring model of global delivery derives much of its revenues from the developed economies in the US and Europe. With the downturn leaving a lot of its customers out of cash, Indian IT companies saw a sudden dip in demand and surge in pricing pressure. What followed was well reflected in the performance of the big and small IT companies in India during the past 12 months. Despite the entire conundrum, the IT majors have predicted a decent rate of 4 to 7% during this fiscal. What's more, the industry body Nasscom expects it to return to double digit growth in FY11. Though it is believed that the pre-crisis growth rates of 30% are unsustainable for now, the US$ 52 bn Indian IT industry is expected to grow at a rate of at least 14% over the next decade.

So what is the reason for this new-found confidence in the minds of industry experts? A closer look at industry's performance for the first half of this fiscal and the metamorphosis that the sector underwent while fighting the crisis can shed some light on this.

Half-yearly result summary
The big 3 of Indian IT i.e. TCS, Infosys and Wipro declared some impressive financial results for the half year ended September 2009. TCS retained its leadership in terms of sales and net profits, growing the topline at 10% YoY and bottomline at 24% YoY during 1HFY10. While Infosys lost its second rank to Wipro in terms of revenue, it managed to maintain its profitability well above the latter. A better than expected performance by the IT biggies came on the back of a revival in demand which resulted in increase in volumes and addition of new customers. A lot of vendor consolidation happening in the marketplace also aided the big 3 in adding more to their revenue pies. This was coupled with some easing of pricing pressure.

Going beyond the big 3, other large firms like HCL Technologies, Oracle Financial Software Service (OFSS) and Tech Mahindra also report reasonably good numbers. Middle-sized firms like 3i-infotech and Mindtree also joined the growth trajectory on back of their niche, client specific end-to-end service offerings. However, the performance of small players like NIIT Technologies, KPIT and Zylog Systems remained muted on back of lower volumes from existing customers which are fewer in number and more price sensitive while dealing with small companies.

Recent trends and future prospects
As a general trend in the industry, the discretionary demand of IT still remains under stress and decision making is still prolonged. Most of the companies performed well on account of repeat business and new customer additions. The half year gone-by saw a significant revival in industry verticals like BFSI, telecom and healthcare, while manufacturing, hi-tech and transportation still remained muted. A lot of merger and acquisition activities happening across the globe resulted in demand for transformation service like business process management, BPO and infrastructure management. High end services like consultancy are still to see a definite comeback.

After the economic reset, the IT firms are beginning to redesign their strategies to grow in the new world. Indian IT saw a shift in focus towards new geographies in the continental Europe, Middle East, Asia Pacific and even towards homegrown opportunities. Sectors like government, energy and utilities which are more immune to menace of credit crunch have started to get the much deserved attention.

To sum up, Indian IT industry's performance shows some definite signs of revival in the world business environment. This revival in sentiments will be reflected in the next year's IT budgets which can be expected to be better in terms of volumes and value. No doubt, many IT companies have revised their revenue guidance for the fiscal, upwards. An air of uncertainty, however, remains about forex movements and the pace of economic recovery. While the long term positive view remains unchanged, we are optimistically cautious about the near future.


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