Indian IT services companies have been struggling amid a shifting
technology landscape, changing client demands, and protectionist
policies in the US. This became quite evident over the last two weeks as
the latest round of quarterly financial results trickled in.
Most firms recorded tepid growth in the July-September 2017 quarter (Q2) of financial year 2018 and shared a sombre forecast.
Here are some highlights from the financial results:
The struggle
Despite it being a seasonally strong quarter, Tata Consultancy Services
(TCS), India’s largest IT services company and a sector bellwether,
posted a lower-than-expected 1.7% quarter-on-quarter revenue growth. The
Q2 figure stood at $4.74 billion, compared to $4.59 billion in the
previous quarter.
This was the 12th straight quarter in which the Mumbai-based firm has
either underperformed or, at best, matched analysts’ estimates. TCS used
to be a consistent out-performer earlier. In a post-earnings report,
HDFC Securities described TCS’s Q2 revenue growth as “uninspiring” and
called out its performance in core geographies as “sub-par.”
Bleak future
On Oct. 17, Wipro, India’s third-largest IT services company, toned down
its revenue growth guidance for the October-December quarter (Q3) to
just between 0% and 2%. This is slower than the 2.1% revenue growth
(pdf) it clocked in Q2.
And Wipro is not alone. On Oct. 24, India’s second-largest IT company,
Infosys, slashed its targeted revenue growth for FY18, hinting that the
year is turning out to be worse than expected. The company now believes
its revenue will grow between 5.5% and 6.5% (pdf) in FY18, as against
6.5-8.5% that it had guided for in July.
Trump threat
The Indian IT sector has been under pressure ever since Donald Trump was
elected US president in November 2016. Trump’s protectionist views are a
threat to India’s IT industry which massively relies on its low-cost
workforce for its largest market, the US.
The Trump administration has already begun clamping down on the H-1B,
the long-term visas that Indian IT companies mostly use for their
personnel travelling for onsite tenures. Apprehensions over US visa
policies continued to show on the Q2 earnings, with most firms
increasing local US hiring.
TCS now ranks among the biggest job creators in the US IT industry,
while 50% of Wipro’s employees in that country are now locals. Over the
next two years, Infosys will hire 10,000 Americans. Meanwhile, mid-sized
player Tech Mahindra said it has increased its staff strength at its
Atlanta office by 100.
This is bad news for their balance
sheets
that are already bearing the weight of tough competition and tight
client budgets. Hiring locals will add pressure on margins which have so
far been maintained because of the low-cost Indian workforce.
Infosys was also among those hit by the move. In 2016, the Royal Bank of
Scotland shelved plans to set up a separate bank in the UK, a project
that was to be partnered by Infosys. Following RBS’s decision, Infosys
lost around $50 million in revenue and had to shift 3,000 employees to
other clients.
Brexit impact
Indian IT is also struggling in its second-largest market, Europe, thanks to Brexit.
Take, for instance,Bengaluru-based Mindtree, which acquired UK-based
consultancy firm Bluefin in 2015. In June this year, the company said
Bluefin was not growing in line with expectations due to a volatile
business environment following Brexit.
More recently,in Q2, HCL, India’s fourth-largest IT services player, was
hit by the post-Brexit currency fluctuation. “There has been some
change in currency, so there are just the currency translation impacts,”
CEO C Vijayakumar said.
The saviour
However, here’s the good news:There’s money coming from digital services
like artificial intelligence (AI), automation, and internet-of-things
(IoT)—verticals that Indian firms have built up over the past decade as
the old cost-arbitrage model fell apart.
“We started training our employees on digital skills a couple of years
ago and this focus has contributed greatly to our growth,” Ajoyendra
Mukherjee, the executive vice-president TCS, told the Business Standard
newspaper. In Q2, TCS’s revenue from digital services grew over 30%
year-on-year.
Infosys attributed 11% of its revenues to digital or new technology services like cloud, data analytics, cybersecurity, and IoT.
At Wipro, these newer verticals accounted for 24% of the revenue. This
share is only expected to grow in future. “Now, digital is pervasive
across all customers,” Wipro CFO Jatin Dalal told the Hindu BusinessLine
newspaper. “These clients will not go back to the old kind of systems.”