IT fares better than expected

The information technology sector has produced better than expected numbers in the first quarter of this financial year, despite stagnant volumes, weak pricing power and quarter-on-quarter appreciation of the rupee against all foreign currencies except the pound.

The 15 IT companies that have declared results so far together clocked 8.4 per cent growth in revenue, the slowest since 2001, largely due to a poor show from Wipro, Tech Mahindra and Polaris Software. But Infosys Technologies and TCS excel, with double-digit growth in year-on-year revenue from software exports.

For the 15 companies taken together, net profit rose 15.3 per cent, with operating margins soaring to a nine-quarter high at 22.7 per cent, thanks to tight control on non-essential expenditure.

Expenses other than salary accounted for 30.4 per cent of net sales compared to 33.8 per cent a year earlier, while employees' cost as a percentage of sales rose to 43.9 per cent from 43.25 per cent in the sequential quarter and 43 per cent a year earlier.

The saving in sales, general and administrative costs has been seen across all IT companies, with TCS and Infosys showing a 250 basis points fall in the past one year.

With a decline in active customers during the quarter ended June, a brake on fresh hiring was put in place by Infosys, TCS and Wipro.

According to the IT analyst at Edelweiss Research, the correlation between headcount growth and revenue growth has started breaking, as firms begin to deploy the shared services model in patches. This means using fungible resources across multiple projects simultaneously.

The employee strength of Infosys, Polaris Software and TCS declined marginally, while Tech Mahindra and Wipro increased it by a few hundreds. So, employee cost for all taken together increased by only 10.7 per cent year on year, compared to 25-30 per cent in the previous four quarters.

The employee cost for the companies studied here remained unchanged over the sequential quarter, while for Infosys and Wipro it declined by around 4 per cent.

The quarter saw significant pressure from customers to reduce billing rates. However, the companies, through fixed price and cost cutting, ensured stable margins despite the decline in billing rates. The companies also shifted the revenue model from onshore to offshore.

Wipro realised 50.4 per cent of its revenues from the offshore model, the highest in recent times. TCS offshore revenues increased by 270 basis points to 50.4 per cent, while Infosys raised its offshore revenue by 110 basis points, to 53.6 per cent.

Most of the pricing cuts were done within February-March and, hence, there was a bit of follow-on impact in the April-June quarter. For Wipro, the offshore rate dipped 2.3 per cent, mainly on the impact of negotiation of rates done earlier. In constant currency, offshore pricing was down 2.4 per cent.

Infosys completed price negotiation and re-negotiation in the BFSI (banking, finance, services and insurance) vertical, but the management believes some clients might come back for re-negotiation. The company expects a 5 per cent dip in pricing against a 6 per cent dip expected earlier.

Image: An Indian employee at a call centre. | Photograph: Sherwin Crasto/Reuters