Figuring out the numbers

It is no longer about just growth and profits. ‘Derisk'. That is the new mantra for Indian IT companies of the likes of TCS, Infosys and Wipro. The industry that evolved by developing new information systems or tweaking existing systems and keeping it going — Application Development and Maintenance or ADM in industry parlance — almost exclusively for US companies today wants to spread the risk. The companies are looking at different geographies, varying verticals and service lines in the hope that if one fails, another will prop up their quarterly and yearly figures. But how well have they fared? We take a look at some key parameters like geographic spread, service focus and vertical plans to get some answers.

Geographies

All major Indian IT Services companies want to de-risk themselves in terms of geographic spread. Infosys wants to get 40 per cent from the US, 40 per cent from Europe, and 20 per cent from the rest of the world. However, in reality, the company gets in excess of 60 per cent from North America. Both Wipro and TCS too get over 50 per cent from North America, so even they are at risk if the US gets into a prolonged recession.

After the US, Europe is the most important continent, so from a geographic spread perspective, we could rate Wipro in the top position because it gets over 28 per cent from Europe. TCS could be considered to stand in the second slot because it gets over 47 per cent from non-US countries. The break-up is not known as between Europe and the rest of the World and for that reason alone, if nothing else, should be ranked second. Here, Infosys is at greatest risk because it has maximum exposure to the US, so one could say that it stands third in this list.

But while companies are trying to derisk by increasing their European presence, there is danger here because Europe itself is not doing well. Karthik Ananth, Director, Zinnov Management Consulting, says, “Over the last five years, all these companies have been trying to crack Europe. But Europe itself has been fluctuating, so it is hard to say if this strategy is a concrete success.”

Commenting on the individual countries, he says that Germany has been doing well, Italy has not been doing fine, while France, which was earlier in trouble, has been recovering, of late. “You should not consider Europe as a single entity. There are multiple countries that need multiple approaches. Germany and France are strong in manufacturing, while the Nordic countries, like Finland, are strong in telecom, thanks to the presence of companies like Ericcson and Nokia.” More than the efforts of the Indian IT companies, Ananth blames the geo-political situation in Europe for the low penetration that companies have there compared with North America.

Services

Comparing services is a tricky business because an apples-to-apples comparison is possible only in the area of ADM. TCS is the leader and gets over 46 per cent from this service, closely followed by Infosys and Wipro, which get over 38 per cent and almost 24 per cent, respectively, from ADM. However, since many companies are trying to push for value-added services and want to move up the value chain, it would be more interesting to look at what else they are doing. From this perspective, Infosys should get kudos for managing to get over 25 per cent of its revenues from consulting and package implementation. TCS, which has managed to ensure that its enterprise solutions division has crossed the 10 per cent mark, can be judged to stand at number two, while Wipro, which has seen revenues from its R&D business dip from 15 to less than 13 per cent, stands third.

Dipen Shah, Senior Vice-President (Private Client Group Research), Kotak Securities, thinks that these three Indian IT companies are moving up the value chain and providing more consulting and products, besides looking at solutions and platforms. “Beyond a point, these companies are comparable in terms of capabilities and breadth. It is just a question of which vertical or service forms a larger part of their revenues,” he says. Therefore, he points out, in a particular year or quarter, if some vertical or client is not doing well, they tend to get more impacted.

“The only major difference is that while TCS and Infosys have their own banking product, Wipro doesn't,” he says. But more than the presence or absence of products, Shah feels that a lot depends on the discretionary spends of clients. “Consulting and R&D are a part of discretionary spending. If a large client puts discretionary spending on hold for a quarter or two, revenues will come down,” he notes. As an example, he cites R&D at Wipro, which has come down because Wipro does a lot of R&D for the telecom sector, which has not being doing well in recent times.

Verticals

Banking, financial services and insurance (BFSI) is is said to be the driver of growth among verticals and is often referred to as one of the reasons why Wipro is having a tough time. In this context, TCS is the most successful and gets over 43 per cent from BFSI. Infosys gets over 28 per cent from BFS (the company lists insurance separately and for the current quarter, insurance contributed 7.3 per cent as opposed to 8.4 per cent in the same quarter last year; we have not taken these figures into consideration because they fall below the cut-off per cent of 10 per cent), followed by Wipro, which gets over 26 per cent from BFSI.

However, there is a more interesting analysis that can be performed from these figures. Just as companies de-risk across geographies, they also try to de-risk their operations based on the industries they target and Wipro seems to have achieved one interesting thing here — it is the only company that gets over 10 per cent from each and every industry it operates in.

The other two companies don't manage this. For example, Infosys got 22.7 per cent this quarter from Retail and Life sciences, but we have only taken Retail and CPG because the other divisions put together contribute 6.6 per cent of revenues, with healthcare contributing just 1.1 per cent towards revenues. TCS also has several divisions that contributed only a small percentage towards revenue — for example, media and entertainment fetched just 1.9 per cent for TCS, and transportation accounted for just 3.1 per cent.

While BFSI seems to be ticking fine, manufacturing, the locomotive of the world economy, is not doing well and this is telling on the bottom lines of the Indian IT companies. According to Sanjeev Hota, Associate Vice-President - Institutional Equities, Sharekhan, “Manufacturing has not revived. It is recovering and some spending has started, but discretionary spending will take time.” When asked to rate the three Indian companies in this sector, Hota says he would rank them as TCS, Infosys and then Wipro, in that order. “You should not look at just the quarterly figures because there can be an aberration in quarterly figures. It is better to look at the LTM (last twelve months),” he stresses.

Putting it all together

If one were to consider the above analysis, Wipro, in spite of being the smallest among the three, emerges on top in two areas, namely verticals and geographies. Infosys is the leader from the services perspective, while TCS leads in revenues.

We could also look at the times when each of the companies has got a ranking other than the top slot. TCS, interestingly, has consistently maintained the number two slot, while Infosys has been pushed to the third slot twice. Wipro has scored the top slot twice and the bottom slot twice.

Of course, end of the day, revenues are the prime indicator of performance. But if one follows Sherlock Holmes' gentle admonition in The Adventure of the Norwood Builder (“It strikes me, my good Lestrade, as being just a trifle too obvious. You do not add imagination to your other great qualities”) and also consider other metrics, one does get a different perspective.

NOTE: We have used figures that the three companies have provided and have omitted those that don't contribute at least 10 per cent of revenues to the current quarter. This means that companies that have done a major break-up — like Infosys separately reporting insurance — may find some practices omitted in these listings. Also, in some cases we have had to combine services because this is what the company has done (for example, Wipro reports manufacturing and hi-tech together), so it sometimes becomes an apples-to-oranges comparison.

> balaji.n@thehindu.co.in

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