Twitter
Advertisement

Mixed results pointing to shift in IT services metrics?

The traditional IT services financial model may be undergoing a paradigm shift, going by the combination of mixed results from biggies such as Accenture and Oracle and revision in guidance by the likes of Cognizant, Infosys and Hexaware.

Latest News
article-main
FacebookTwitterWhatsappLinkedin

The traditional IT services financial model may be undergoing a paradigm shift, going by the combination of mixed results from biggies such as Accenture and Oracle and revision in guidance by the likes of Cognizant, Infosys and Hexaware.

There are several examples to support this.

First, Indian IT was expected to benefit greatly from rupee depreciation, which didn't happen. Infosys was expected to perform exceptionally well after the Lodestone acquisition; instead, it is seen lowering its guidance for FY13 for the second time.

Secondly, shortly after reporting numbers just 5% below those of sector leader TCS, Cognizant announced a cut in guidance saying it will grow less than peers in the second half of 2013. But weeks later, it acquired 11 companies of German group C-1 for an undisclosed amount, at a time when most analysts were convinced there would be few mergers and acquisitions.

Thirdly, the street had predicted a single-digit growth for Indian IT in FY13 in view of the US fiscal cliff and laggard deal flows. However, Gartner recently forecast a 5%-plus growth in worldwide IT services spending in 2013, against 2% in 2012, and a 13% growth for the Indian IT services sector.

Companies like TCS also said discretionary spends were picking up after a gap of almost 1.5 years, which led some analysts to predict a better second half for Indian IT.

However, at the same time, the analysts predicted that Infosys was likely to again revise FY13 guidance.

“A pick-up in corporate IT spending in the latter part of 2013 cannot be ruled out. This would have a double benefit for the Indian IT services stocks, in terms of earnings upgrades as well as potential re-rating of earnings multiples,” Anantha Narayan and Sagar Rastogi of Credit Suisse said in a note to investors on Wednesday.

The duo also believed that Infosys would likely be the biggest beneficiary of a pick-up in IT spends, given its higher exposure to discretionary budgets, its large bench and the significant stock under performance in 2012. But TCS would be the top large-cap pick from a risk-return perspective for such an eventuality, given that Infosys is likely to announce a cut in its FY13 dollar revenue guidance to 3%, from the current 5%, when it details earnings on Friday.

“TCS reported a yoy and qoq decline in Ebitda (earnings before interest, tax, depreciation and amortization) margin in 2QFY13 despite stable ‘core’ metrics and material benefits of the rupee depreciation. Wipro reported Ebitda margin decline despite a 0.9% yoy increase in realization and rupee depreciation tailwinds. In addition, the biggest source of margin pressure for Infosys has been a sharp rise in onsite per capita wage costs, inexplicable by ‘normal’ wage inflation assumptions. All this has led to an increasing disconnect in volumes, prices and wages,” Kawaljeet Saluja, Rohit Chordia and Shyam M of Kotak Institutional Equities said in a note last week.

Another significant shift pertains to the offshoring IT model.

“The offshore delivery model has permanently changed the IT services industry. However, established western vendors have grown their offshore capabilities and India-heritage vendors have expanded their offerings,” Mitali Ghosh, Sara Gubins, Scott D Craig and Chandramouli Sriraman of Bank of America Merrill Lynch said in a note.

Thus, while the margins of Accenture and IBM are expected to increase at least 100 basis points on improved productivity and more offshore capabilities, over the next five years, the margins of offshore IT services firms may only modestly converge with western vendors on a constant currency basis.

Find your daily dose of news & explainers in your WhatsApp. Stay updated, Stay informed-  Follow DNA on WhatsApp.
Advertisement

Live tv

Advertisement
Advertisement