Not out of the woods

Venkatesh Ganesh | Updated on November 23, 2017


While the second quarter was aided by a depreciating Rupee and signs of outsourcing demand pickup, the rest of the fiscal year may not be strong due to impending passage of the Immigration Bill, increased regulatory oversight regarding visas and continuing uncertainty surrounding US debt, which may force corporates to pause spending on IT.

In its recently held press conference, TK Kurien, CEO of Wipro, while announcing its quarterly performance, urged reporters and analysts to look at the fact that the company’s recent strategies- in terms of bagging outsourcing deals, newer technology engagements will start to bear fruits in fiscal 2014. “We are well positioned to get back to industry leading growth rates next fiscal,” he said. Similarly, SD Shibulal, CEO of Infosys when posting strong quarterly numbers cautioned and said that the company expects retail sales in the US to be low this year as compared to the previous one due to persistent unemployment. Morgan Stanley has already forecasted bleak retail sales, citing weak economic growth.

It is a general refrain in the IT circles. October – December quarter tends to be a slow quarter as holiday season kicks and companies work for lesser days. This means, IT companies get to bill for a lesser amount of outsourcing work. The same trend continues to play out in the January-March quarter when multinational firms decide on their tech budgets. Decisions get finalised in February, which leaves a month for companies to quantify the volume of work that comes their way.

Growth story

Data suggests that on an average, IT companies have grown around eight per cent in the first two quarters this fiscal. Despite giving indications that outsourcing spends are starting to come back, the persistent slowdown in the US economy and the debt ceiling issue which is bound to come up in January can be party poopers, said Sanjoy Sen, Deloitte.

Apart from slowdown, a majority of American multinational companies are still not convinced about the value that Indian outsourcers bring to the table, apart from reduction in cost. “Offshore-based firms need to work harder on their relevant differentiation and invest more in efforts to move up the value chain and create a more refreshing customer experience,” opines Peter Schumacher, CEO, Value Leadership Group. He adds that while they have a strong interest in helping Indian companies move up the value chain and are willing to partner with them to help them accomplish this, more efforts need to be put in to convince customers of this value. Agrees Sanchit Vir Gogia, Chief Analyst, Greyhound Research. In this level playing field everyone is competing for the same set of accounts, it is crucial for Indian firms to move into more strategic consulting offerings since that is the area where larger firms like IBM, Accenture dominate.

This partly explains the problems that Indian outsourcing companies, apart from Cognizant, TCS and HCL are faced with as compared to Infosys and Wipro who are clearly struggling. However, giants like IBM and Accenture are having to dig deep as growth continues to slow as competition increases.

Immigration Bill overhang

The Bill with its outplacement clause, which restricts the number of people working in client offices in the US is a big cause of concern. In a series of recent customer strategy sessions organised by Deutsche Bank and the Value Leadership Group that involved decision makers in multinationals, pointed out that outsourcing vendors will have to innovate to counter the impact of the impending comprehensive Immigration Bill in the US. The case for the Bill is gathering strength as Indian IT companies are coming under increasing scrutiny by the Department of Homeland Security and other regulatory authorities.

Infosys had to settle recently for $34 million in a civil settlement with the US authorities when probed for visa-related frauds. The company, however, denied any wrongdoing. “This will have a big impact on the industry in general,” according to Rajkamal Rao of Rao Advisors, who recently wrote a book on immigration. Others share similar views.

While growth seemed to be picking up, the current investigation by the US visa authorities into fraudulent visa practices by IT firms following the Infosys controversy can surely be a dampener, feels Gogia.

The reason for this big concern lies in the fact that upwards of 70 per cent of revenues of exporters comes from the American market. To be fair, companies are doing their bit, partly as strategy and partly due to lack of alternatives. For example, rejection rates for H1-B visas were 17 per cent and L1 petitions rejection rates hovered around 27 per cent in the 2012 fiscal according to the US authorities’ data.

Then there is the issue of cross currency headwinds. The weakening rupee, which considerably boosted profits of IT companies in the first couple of quarters, might not yield similar gains as the Rupee seems to return to some stability (at the time of writing this, the Rupee hit a two month low to hit 63.71 versus the US Dollar).

With every passing year, these issues have affected the business of Indian companies and so has the script which has changed considerably in the last three years or so.

While TCS and Cognizant have been clocking double digit growth rates with HCL catching up with similar growth rates, Infosys and Wipro have not managed to achieve that kind of growth and have been issuing cautionary outlook.

As competition heats up from mid-sized companies like Tech Mahindra, Mindtree, KPIT Cummins on the software side and Genpact, WNS, EXL and others on the BPO front, big sized companies can no longer look at scale (of their manpower) as the only differentiator.

A way out

There is some silver lining for the sector and it comes from growth shown in the last two quarters for companies like TCS, Cognizant and HCL Tech. For example, going by TCS’ quarterly US dollar revenue growth stands at 13.4 per cent in the last two quarters and while the company does not give any guidance, a back of the envelope calculation on flat growth in the next two quarters still puts the company ahead of Nasscom’s 11-14 per cent guidance for the year. Similar is the case with Cognizant, which expects to grow at least 20.3 per cent this year. While Infosys’ growth rates have been inconsistent in the last eight quarters (it has become predictable in the last two quarters) and Wipro also looking forward to the next fiscal, the industry and investors are watching whether both these companies can end this fiscal year meeting at least Nasscom’s growth expectations for the sector. In a recent report, Deutsche Bank wrote that Infosys and Wipro, are struggling to emerge from the problems of organisation restructuring and leadership changes and goes on add that Infosys is slightly more vulnerable than Wipro. According to Ankita Somani, IT & Telecom analyst with Angel Broking, even if the company posts flat revenue growth in the next two quarters it will be able to achieve 10.5 per cent (in US dollar terms) revenue growth in fiscal 2014.


Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

Published on November 15, 2013
This article is closed for comments.
Please Email the Editor