Back on Growth Track

Given the demand pickup in sectors such as banking and financial services, manufacturing and telecom, the IT industry looks poised for a rebound

THE performance of the top IT deck during the March 2010 quarter indicates gradual recovery in demand from major business verticals. The top four IT exporters in the country —TCS, Infosys, Wipro, and HCL Tech — have taken initiatives to retain and beef up their headcount citing the comeback of discretionary projects. Given the pickup in demand in erstwhile beleaguered sectors, such as banking and financial services, manufacturing and telecom, the IT sector looks poised for a rebound. 

    During the March 2010 quarter, the top four companies continued to report a moderate growth in sales and profit on sequential basis at the aggregate level for the third consecutive quarter. However, the rate of growth has tapered down. Aggregate sales increased by 2% and net profit grew by 3.8%. 
    This was lower than a 2.5% sales growth and a 5% profit growth in the third quarter and much lower than that in the second quarter when sales grew by 5% and profit rose by 6%. 
    The deceleration in the performance can mainly be attributed to strengthening of the rupee against the dollar over the past three quarters. The rupee has appreciated by more than 5% during the said period. A stronger rupee adversely impacts revenue and profitability of exporting companies. 
    Excluding the currency impact, the top companies have shown improvement in demand pickup. For instance, sequential volume growth measured in terms of manhours billed during the quarter was higher for most companies in the March quarter than in the previous few quarters. For TCS and Wipro, volumes grew by 4%. It was just over 5% for Infosys, while HCL Tech reported the strongest growth of 9% in its volumes. 
    Top players have also announced higher employee additions in FY11. TCS has made 20,000 campus offers for FY11 whereas Infosys has announced that it will recruit 30,000 employees on board. Wipro indicated that it would beef up its headcount by 11,000-12,000 this fiscal. While a major part of this exercise is to take advantage of improving demand scenario, a part of it is also to address the increasing attrition since fresh recruitment is gaining momentum in the IT sector. 
    Another indicator of resuming growth is the strong revenue guidance given by Infosys. It has guided for 16-18% revenue growth in dollar terms this fiscal, much faster than a 4.3% growth in the year ended March 2010. It expects the growth to spread out evenly across the next four quarters. 
    However, not all the IT exporters would be able to take advantage of the demand pickup. A few companies are yet to show significant improvement in their performance. For instance, Patni Computer Systems reported lower growth of around 2% in business volumes and falling operating income in the March quarter. New client additions were also lower during the quarter. Given its lower guidance for the next quarter, the company is likely to take some more time before it reports improvement in business. 
    The appreciating rupee against major currencies, including dollar, pound and euro may impact operating margins of IT exporters in the coming quarters. On average, every 1% appreciation in the rupee against the dollar reduces operating margin by 30-50 basis points. 
    The stocks of the top four IT companies have seen a good traction on bourses since January backed by the expectation of better demand scenario. Their returns during the period have been higher than the benchmark indices. At the current price levels, their priceearnings (P/E) multiple hovers between 18 and 27 with HCL Tech at the lowest end and Infosys on the highest side. The current valuations largely reflect the near term growth prospects. Whether these levels are sustainable would depend upon how well IT players take advantage of growing outsourcing opportunities. 
    ranjit.shinde@timesgroup.com