World economy sees re-ordering of Indian infotech companies’ fortunes

Cognizant has finally toppled Infosys from its number two spot in the Indian IT industry. What remains to be seen is whether Cognizant has enough firepower to remain in that position for long.

The $100-billion Indian IT sector is seeing a change in the pecking order and continues to see pricing pressures, small wage hikes and reduction in project volumes in an uncertain economic climate.

The first quarter of FY13 was unique in a couple of aspects in the history of Indian IT. For the first time, Infosys was overtaken by Cognizant in revenue terms and Infosys declined to give guidance for the quarter ahead, citing lack of visibility in outsourcing deals.

Cognizant, the last IT major to report results, has gone past Infosys, and when the company announced June quarter results, it maintained its guidance for the rest of FY13, thereby re-emphasising its 20 per cent growth for the remaining period.

In an analyst call, CEO Francisco D’Souza said Cognizant closed a number of significant transformational engagements, including ING in the US, and Philips.

A transformational deal is one where a service provider gets incentives for delivering projects with business processes in mind. The company continues to see more such transformational deals in its pipeline.

Looking at the results posted in the quarter ended June, TCS, Cognizant and HCL are ahead of the pack as Infosys and Wipro continue to struggle in the backdrop of economic woes in the US and Europe. TCS posted a 38 per cent increase in revenues at Rs 14,869 crore and a 37 per cent growth in net profit at Rs 3,318 crore.

Bullish about TCS

Analysts are upbeat about the consistency of TCS’ growth in net profits, revenues and volumes in the last few quarters and the top management’s confidence about surpassing Nasscom’s growth estimates for FY13.

“TCS management has indicated that clients are aware of the challenging macro environment but also continues to see good demand from global companies,” says Ankita Somani, IT analyst at Angel Broking.

Others give TCS management credit for driving consistent growth. TCS’ broad-based execution defying concerns relating to the prevailing macro environment is something to be noted, says Ashish Chopra, IT analyst, Motilal Oswal.

Apart from TCS, analysts are bullish on HCL Technologies’ execution strategy and its bagging billion dollar deals with longer time duration. “Large billion dollar deals won in FY12 would help it retain margins as fresh competition from competitors starts to kick in,” says Shashi Bhusan, analyst, Prabhudas Lilladher. The company won eight high-value outsourcing deals in the quarter ended June on the back of $2.5-billion worth of outsourcing deals in its previous quarters. “Add to that guidance of maintaining margins sets the tone for a healthy FY13,” says Chopra.

Infy, Wipro muted

Meanwhile, both Infosys and Wipro have cited lesser visibility for their business in the US and Europe and accordingly have given muted guidance. This, coupled with change in management and strategies in both companies that were put in place last year is yet to see dividends, according to industry watchers. “Wipro is still in the process of realigning its capabilities and positive results from the organisation restructuring exercise are yet to be seen,” says Somani.

Additionally, bagging transformational deals, increasing project volumes and reducing employees on the bench has been going on for the last few quarters. Infosys at present has utilisation of 67.2-71.6 per cent and the company has been struggling to get its utilisation rates up in the last six quarters.

Wipro’s current gross utilisation stands at 68.3 per cent and is lower as compared to its peers. TCS currently has employee utilisation in the range of 81-83 per cent. Employees in Infosys have yet to receive hikes while TCS, HCL and Wipro have given single-digit hikes.

(This article was published on August 7, 2012)
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