The December quarter numbers (and the financials for the nine months of FY19) of most IT firms — top and mid-tiers — seem to reiterate the trend of a significant recovery in the segment. This revival is important as FY17 and FY18 were tough for the IT sector and most firms managed only single-digit revenue growth in dollar terms.
The latest healthy numbers are welcome given that the third quarter is usually a weak one for IT companies. Trade body Nasscom announced that the IT industry grew by 9.2 per cent in FY19 (calendar year 2018), as against the 7-9 per cent growth it had forecast at the start of the year.
Here are some key takeaways from the IT sector’s results, and some trends witnessed in the current fiscal.
Mid-caps outshine top-tiers
Revenues of mid-tier companies, such as Hexaware, Mphasis, Mindtree, Zensar Technologies, L&T Infotech and L&T Technology Services, grew by 12.4-23 per cent y-o-y in dollar terms during the third quarter of FY19. Top-tier IT companies, such as Infosys, TCS and HCL Technologies, delivered 8.4-10.8 per cent growth during the same period. Wipro and Tech Mahindra are also slowly recovering. TCS and HCL are likely to end the financial year with double-digit revenue growth. This means that Infosys has upped its revenue growth guidance from 6-8 per cent earlier to 8.5-9 per cent now.
The revival appears to be across companies in the industry, suggesting that client spends are on the rise. And mid-tier players appear to be leading the way with solid growth in the third quarter and the nine months of this fiscal.
The digital push
For much of the past couple of years, Indian IT companies have been trying to move away from their traditional application development and maintenance service offerings to the digital needs of clients. Generally, cloud, social media, analytics and automation offerings are referred to as digital services, though there is no standard definition.
Increasingly, key client segments, such as banking, insurance, financial services, automotive, retail and manufacturing, seek digital capabilities from Indian IT vendors. Digital deals tend to provide better margins than traditional application services.
Digital revenues have grown 35-49 per cent y-o-y in the third quarter for Wipro, Infosys and TCS. For most of these companies, almost a quarter of their revenues comes from digital offerings. L&T Infotech, Mindtree and Zensar also reported good traction in digital deals, and revenues from these offerings increased by 32-36 per cent in the December quarter. Key segments, such as BFSI, energy & utilities, manufacturing and retail, have contributed to this growth. These verticals collectively generate 50-70 per cent of revenues for the IT players.
Deals galore
Infosys has managed to sign a large number of deals. The total contract value of all the deals it has signed this fiscal is about $4.7 billion, which represents a steep increase from the previous years. TCS is closely competing with global major Accenture and winning a larger share of projects from clients. Mindtree has total deal bookings of $833 million, while Hexaware reported bookings of $210 million.
Geography-wise, the US and Europe continue to hold strong. But with the current uncertainty in the US because of the government shutdown and with the possibility of a no-deal Brexit looming, there could be uncertainty in the deal pipeline for these IT players.
Depreciating rupee
A weak rupee is generally favourable for Indian IT players. The rupee has depreciated against the US dollar from 65 last year to around 71 currently. But this weakness has not translated to better margins. A report from HDFC Securities indicates that operating margins have remained relatively stable at 23.4 per cent in the December quarter, despite the fall in the rupee. As some clients ask for discounts or benefits to be passed on in pricing when large deals are negotiated, when the rupee is weak, IT vendors tend not to enjoy the full benefit of a depreciating currency. The hedging policy of these companies may also be a cause for them not being able to reap the full gains of a weak rupee.
On the whole, the next year or two promise to be healthy for the IT industry.