Out of the woods

| Updated on January 22, 2019 Published on January 22, 2019

Strong revenues from the top IT firms confirm a turnaround, but margin pressures remain

With the Nifty IT Index up by 18 per cent in the past year, information technology stocks have put up a sterling show even as rest of the Indian market has struggled to hold its head above water. December quarter earnings from India’s leading IT companies suggest that the market’s bullish bets on the sector were justified. Punctuated by the holiday season, September-December has traditionally been a weak quarter, but these firms have reported surprisingly strong numbers this time around. As this has followed an equally robust July-September, hopes are now high that leading software firms will close FY19 with dollar revenue growth that betters Nasscom’s forecast of 7-9 per cent. That would signal that the IT industry after battling odds from slowing deals, automation and disruptions in demand for the last three years, is now out of the woods.

There are three aspects to the numbers that suggest that the recent recovery isn’t just a flash in the pan. For one, all three frontline IT companies have reported strong revenue growth in constant currency terms (Wipro at 7 per cent, Infosys at 10.1 per cent and TCS at 12.1 per cent) suggesting genuine business traction, without factoring in the tailwinds from the depreciating Rupee. Two, they’ve also reported a rising number of transformational deal-wins through 2018, with positive commentary on the critical BFSI and North America segments. Three, digital offerings have continued to expand at upwards of 30 per cent showing that the leading players have wrought a successful business transformation to tap into fast-growing segments of the global IT pie. The good numbers have been achieved in the backdrop of a particularly turbulent period for global markets. This suggests that looming global risks such as simmering US-China trade wars, slowing global growth or Brexit may not be necessarily bad for Indian software majors, who could turn out to be beneficiaries of belt-tightening efforts. Despite strong business growth though, margin pressures remain. Both TCS and Infosys saw their operating profit margins shrink in the December quarter owing to onshore hiring and sub-contracting costs as US visa curbs and lower billing rates hit home.

Given this backdrop, the turnaround in the IT pack may be good news for the stock market, which has been looking to a handful of index names to prop up profit growth this year. But it may not materially boost the employment prospects for the economy at large. In the first nine months of FY19, the top three firms made net additions of about 64,300 employees to their workforce, a more than two-fold improvement over last year. But that’s still a small number compared to the 10-15 lakh engineers that India churns out annually. As the Indian IT majors’ ability to survive in the global marketplace now relies on the quality of their new hires rather than quantity, policymakers need to look for new sectors to stand in for them, on their job creation challenge.

Published on January 22, 2019
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