Wednesday, 9 May 2012

How India's top 4 IT companies performed

The performance of India's top four IT services companies in the just-ended quarter and fiscal has made one thing quite clear - that growth, or a drop in growth, is now more a company-specific phenomenon, rather than something that captures the health of the entire industry. 

The performances of the top Indian IT players have also exposed the strengths and weaknesses of the strategies that each had adopted in the past few years, especially post the economic crisis of 2008. Amongst all the Indian IT services providers, TCS seems to have delivered the best all-round performance, ending the financial year on a similar positive note that it did when it announced its first quarter results in the beginning of FY12.
In the case of HCL Technologies, growth has come from its aggressive strategy to gain market share and gather critical mass by not worrying too much about profitability.

The company seems to have benefitted from restructured (re-negotiated) deals where wins typically happen when companies give good pricing discounts, but are also good at execution. The scorching pace at which TCS grew in FY12 can be gauged from the fact that the company added about Rs 11,569 crore (Rs 115.69 billion) in revenues during the past four quarters, to close the fiscal with revenues of Rs 48,894 crore (Rs 488.94 billion). 
On the other hand, Infosys added close to Rs 6,233 crore (Rs 62.33 billion) to its revenues of Rs 27,501 crore (Rs 275.01 billion) at the end of FY11 and Wipro added about Rs 4,946 crore (Rs 49.46 billion) to its IT services revenues of Rs 23,485 crore (Rs 234.85 billion). 

Infosys had a lacklustre quarter and year. It failed to meet the revenue guidance for both the fourth quarter as well as the full year - that too, despite revising its guidance downwards last quarter. 

Among the top four Indian IT services providers, despite being the largest revenue generator, TCS posted the highest growth in its revenues on a year-on-year basis in the quarter ended March 31, 2012 (30.5 per cent) versus 22.1 per cent for Infosys, 21 per cent for Wipro and 25 per cent for HCL Technologies.  TCS was the only player among the four to register a quarter-on-quarter increase in revenues, though marginal. 

TCS and HCL Technologies also reported a sequential increase in their net profits, whereas for Infosys it declined by 2.4 per cent and for Wipro by 0.63 per cent.
In terms of volume growth, TCS had been quite steady in the last four quarters with a volume growth of 3.3, 3.2, 6.3 and 7.4 per cent respectively whereas Infosys reported a 1.5 per cent drop in volume in the Q4 of FY12. In the Q4 of FY12, HCL Technologies was right behind TCS with a volume growth of 2.85 per cent and even Wipro showed a positive growth of close to one per cent.

Industry experts believe that Infosys and Wipro are clearly lagging TCS, HCL as well as US-headquartered Cognizant. In case of Infosys, the problem is a culmination of many things. 

There are a few issues which are quite specific to Infosys, and to a certain extent, to Wipro. F or example, with close to 30 per cent of its revenues coming from consulting and system integration works, the highest among all the Indian IT companies, Infosys' dependence on discretionary spending (spending by corporates which can be held back at discretion and generally done for long-term benefits) is much higher than the other companies. 

During troubled economic times, clients tend to tighten their discretionary spends first which took a toll on Infosys in Q4. "Many of the ramp-ups we were expecting did not happen in time, we saw ramp-downs in certain accounts and there were leadership changes by certain clients which affected the growth of those accounts," said S D Shibulal, CEO & MD of Infosys.
Besides, the company's positioning itself as a premier global consulting and system integration (SI) major, as a part of Infosys 3.0, was done at a time when the global economy had not completely come out of the slowdown.  Analysts feel that this might have backfired for the company to a certain extent. 
"The positioning of Infosys also went wrong from a timing perspective. When they restructured, they consolidated their verticals as well as consolidated their service lines, and positioned themselves as a high-end global consulting and SI organisation, and this happened immediately after their leadership change exercise. Then, when they tried executing the strategy, the economy went down again," said Arup Roy, principal research analyst, Gartner.  n case of Wipro, the company is showing a growth trajectory after having completed four quarters after the last organisational restructuring, including the one that, for the last time, supported the joint CEO model. 

While going in for a restructuring, Wipro had stated that the company will be back to its usual growth path within six quarters which means it still has two quarters to prove itself.  "The foundation has been laid and we have got the basics right. Now we have to figure out how we will differentiate ourselves," said T K Kurien, CEO of Wipro's IT business. Industry experts however feel there are certain mismatches between what Wipro is trying to position itself as, and what the customers perceive the company to be. "I   feel either there is something wrong in Wipro's base strategy or the way they are positing themselves is not reaching to the clients correctly. Clients don't perceive them as a transformational partner or a business solution partner as the company claims. They look at Wipro more as a technology-centric cost cutting vendor," said Sudin Apte, principal analyst and CEO of offshore advisory firm Offshore Insights. 

Given this, he says Infosys' problems are quite easy to fix compared to Wipro's. "Because, fundamentally there is nothing wrong in Infosys's strategy, in its ability to understand business domain and deliver solutions," adds Apte. 

"TCS' success seems to be driven by a combination of several factors, including its successful execution of its restructuring much earlier than the others when S Ramadorai retired from the company, leaving N Chandrasekaran at the helm. 

The leadership change did not cause much disruption in the company, unlike Infosys and Wipro, thus limiting the impact on client sentiments. 

The company's approach of integrated services - applications, infrastructure and BPO - is gaining good traction. Most importantly, according to industry experts, TCS is a very flexible company to enter into a contract with.
"If you look at TCS's fixed price components, it is at least 8 to 10 per cent higher than their peers. It is because they commit the total cost of ownership of their project to the clients which is very critical. When budgets are tight, clients want total cost predictability and TCS' ability to commit that is higher than the others," said Apte of Offshore Insights.
Added Amneet Singh, country head, Everest Group, "TCS has the reputation of being a flexible and trusted partner. I am sure they are much more open to clients' suggestions in the contracts. Infosys historically has been a very premium priced player. It is sometimes perceived to be not so flexible."

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