Infosys, TCS, HCL brace for good times

Though IT firms have posted good set of numbers, rising staff costs at home and selling costs in client countries are likely to put pressure on margins when price rises will not be easy to come by.

Four of India’s five leading export-driven software firms (the results of Cognizant are not yet in but are expected to be similar) have turned in very favourable results for the fourth quarter of 2013-14.

This clearly indicates that the developed economies as a whole are on the mend. 

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The outlook is the most positive for the American economy.

The United States also happens to be the most important market for Indian firms; it accounts for around 60 per cent of their revenue.

Recovery prospects for Europe are not yet clear, but firms there are also increasing expenditure on information technology (IT). 

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This is part of a general pattern under which the prospects of recovery, rather than recovery itself, give a boost to clients’ IT budgets.

Gartner has projected a 3.1 per cent rise in global IT spending in 2014, compared to a flat 2013.

When firms see economic recovery round the corner, they try to ready themselves for it by improving their efficiency through IT in order to withstand competition better.

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Industry leader Tata Consultancy Services (TCS) reported a robust 31.2 per cent year-on-year rise in its revenue during the quarter.

This has been more than matched by a 51.5 per cent rise year on year in its bottom line. 

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That margins have also improved clearly establishes the company as a leader in terms of not only size and growth but profitability too. In view of what it has already achieved and the current global prospects, TCS has clearly indicated that it is “upbeat” on prospects for the next 12 months. 

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In this scenario, the domestic market, which usually does well in the last quarter of the financial year but was afflicted this year by pre-election atrophy, will be expected to do its bit. 

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The other firm that has shone is HCL Technologies; its bottom line has grown by 59 per cent. It has, for several quarters, turned in positive numbers on both revenue and margins and, thus, has no difficulty in taking a bullish view of the year ahead.

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Among the laggards in this league is former top performer Infosys. On both its top line and bottom line, it has performed well. 

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It has grown around 25 per cent on a year-on-year basis, but this is no longer the best in class. 

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The markets are, of course, disappointed by Infosys’ guidance for the current year of sales growth of seven to nine per cent, which is close to half the industry average projected by Nasscom. 

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However, this should be discounted in view of the firm’s habit of under-promising. Wipro has also done well; it has reported a 24 per cent year-on-year growth in sales for IT services. 

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However, this performance does not let the firm top the league. Its own turnaround exercise is not yet complete.

Overall, Indian IT services firms are buoyant and are planning to hire aggressively. 

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Considering that attrition rates are rising across firms and utilisation rates are rising for most companies, boom conditions are likely to emerge by the end of the year.

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Rising staff costs at home and selling costs in client countries are likely to put pressure on margins when price rises will not be easy to come by.

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Rising staff costs at home and selling costs in client countries are likely to put pressure on margins when price rises will not be easy to come by.

Efficiency gains from technology will be the key weapon, but that means more investment in research and development. So, good times may be ahead, but challenges are, too.