The Indian information technology services sector has done well in the quarter ended March 31, with year-on-year revenue and profit growth for the top seven firms distinctly better than in the previous three quarters.
However, small and mid-size firms have disappointed, with flat revenue and a modest 13 per cent rise in net profit.
Growth in revenue remains single-digit for all four quarters, suggesting muted pricing power, no escalation in clients' budgets and appreciation of the rupee by six per cent in the past year and 1.5 per cent during the fourth quarter.
The net profit rose more than 20 per cent, as companies benefited from revenue hedging on account of the strong rupee.
Improvement ahead
The net additions in clients remained subdued, with numbers for the top seven companies up by only six in the past year, and thanks only to a net addition of 23 in the fourth quarter.
However, the outlook seems to be changing. There has been quarterly addition of over 140 new clients in each of the past three quarters. Two, there has been net hiring of 27,641 employees in the fourth quarter, with a proposed addition of around 1,00,000 more in 2010-11.
The increase in revenue predicted by Cognizant for calendar year 2010 from 20 per cent to 25 per cent and the discussion it has initiated on a price hike with its clients also suggest an improving environment ahead.
The net margins of large and small-midcap companies have seen steady improvement from 17.3 per cent eight quarters earlier to 21.6 per cent in the quarter under review, due to increase in volume growth and cost control.
The total expenditure to sales ratio declined consistently from 81.4 per cent in the quarter ended June 2008 to 79.4 per cent during the quarter ended March 2009 and 76.6 per cent now.
The ratio of cost of employees to sales has been more or less steady, around 44 per cent in the past eight quarters, despite a net addition of about 1,44,000 employees by the top seven companies.
Infosys Technologies and Tata Consultancy Services (TCS) had built strong bench strength (staff without project work) during the slowdown, to utilise during an expected expansion in projects.
This helped Infosys and TCS to deliver volume growth without adding cost. HCL Tech and Wipro were affected more by increased attrition and wage inflation than Infosys and TCS.
The year-on-year net margins of TCS improved by 470 basis points to 25.85 per cent, as the company's total cost to sales ratio declined over 455 basis points over the same quarter last year.
TCS added around 19,000 employees last year, but the ratio of cost of employees to sales fell from 37.4 per cent a year earlier to 35 per cent, indicating higher utilisation.
Hedging pluses
Going forward, Indian IT services companies are likely to benefit from the hedging of export revenue at Rs 46-50 a dollar, with the rupee now averaging at Rs 44.50. Infosys has a hedge position at the end of the quarter at $525 million.
The company has forward contracts of $267 million, Euro 22 million, 11 million pound and A$3 million, plus options' contracts of $200 million. The management hedges two quarters' net exposure.
Infosys margins would be impacted by rupee appreciation by three per cent if the revenue productivity is assumed to be flat. The impact of this year's pay hike would be 300 basis points.
TCS expects to maintain margins at current levels at a rupee/dollar rate of 46. The rupee appreciation would have an impact on margins. Wipro's gross hedge is $1.7 billion, at Rs 40-50 a dollar.
It expects to face margin pressure and lower growth in revenue if the rupee appreciates more than an average of 45.60.
Polaris has a hedge of $100 million at Rs 48.28 and expects 30-33 per cent growth in earnings on the back of a growing size in product deals. Tech Mahindra has forward hedges of close to $670 million at Rs 46.7 and 270 million pound at $1.78/pound.
