IT’s getting tough

The first set of earnings reports from Indian IT majors indicates that conditions are likely to get extremely difficult from here on and companies need to seriously reconsider their growth strategies. Despite the April-June quarter being a strong period traditionally for IT companies, most large and mid-tier companies that have so far announced their quarterly results have missed market estimates, while the slowing global economy is going to pose a serious challenge in the coming quarters too. Unlike a decade ago, when a weak rupee was enough to buttress earnings for IT companies, the picture is quite different today, with only 60 per cent or less of earnings denominated in dollars. From slowing discretionary spends by companies in energy, telecom, BFSI and manufacturing spaces to increase in competition forcing price cuts and drop in operating margins, there are problems aplenty for IT companies. Further, a large portion of the new orders from clients are in the SMAC (social, mobile, analytics and cloud) stack and not many Indian IT companies are well placed to take them up. This has been resulting in loss of market share. The US market, which accounts for over 60 per cent of revenues for the Indian IT industry, is not yet out of the woods, despite some data points signalling a recovery. US corporates are still not confident enough to up spends on business development; they have been using the surplus cash to announce more buy backs. Numbers from S&P 500 Dow Jones indices show that companies in the S&P 500 basket spent a record $589.4 billion in share buybacks in 2015-16, surpassing the previous high of $589.1 billion in 2007.

The gloom in the US business environment is reflected in the June quarter numbers of Indian IT services majors. Infosys sharply downgraded its revenue guidance for 2016-17 to 10.5-12 per cent in constant currency terms, down from 11.5-13.5 per cent. Infosys, as also Wipro, cited slowing discretionary spends and increasing global risks due to Brexit as impacting their order book. Macro problems aside, the Indian IT industry is also struggling to get over problems posed by increasing attrition and sliding margins. Wipro for instance reported employee attrition at 17.9 per cent in the June quarter, up from 14.9 per cent in the March quarter and its margins dropped to the lowest in recent past.

The Indian IT industry can ride through the present difficult time, if they leave behind their conservative strategies. Even Infosys, which is targeting revenues of $20 billion by 2020, expects just $1.5 billion to come from acquisitions. While it is not impossible to grow consulting capabilities and digital skills in-house, it takes time, and by then, other global competitors would have raced ahead. At about $4-5 billion, the war chest of top tier companiesis brimming. If these funds, currently going into mutual funds and government securities, are used for acquiring other companies, it will help bring about much-needed growth.

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