Tata Consultancy Services and HCL Technologies have marched ahead of Infosys and Wipro by delivering all-round growth in a traditionally weak third quarter.
While HCL registered the highest growth on net profits and overall turnover, it continues to pick up work at the lowest margins. On the other hand, TCS results beat market expectations on almost all parameters while Infosys and Wipro’s were ‘below par’, industry watchers say.
“TCS has been an outperformer not only in the quarter but also in the calendar gone by. It is easier for a smaller company to grow from a smaller base, but a growth of 30 per cent on a quarterly revenue run rate of over $2 billion is certainly impressive,” Mr Jimit Arora, Everest Group’s research director, said.
On the other hand, the HCL management has realised that it needs to improve its operating margins which were 16.3 per cent at the end of the quarter. Its CFO, Mr Anil Chanana, said it would improve operating margin by at least two percentage points by the time it declares its June 2010 quarter results. This will be achieved through higher employee utilisation and a better deal pipeline.
HCL’s biz model
“HCL has been known to give in to aggressive discounts for winning more business. It is a model that has worked for the company in the past. Given the management focus on improving margins, we may not see the typical aggressive pricing that HCL is known for,” said Mr Arora.
For Wipro, investors were disappointed with a meagre 1.5 per cent growth in business volumes for its IT services, well below the 5.7 per cent, 3.1 per cent and 6.5 per cent growth posted by TCS, Infosys and HCL.
“One can always argue that profits were impacted because of unanticipated currency fluctuations or some fancy derivative product which did not yield the desired result. But how do you explain weak volume growth?” asks Mr Alok Shende, principal analyst and founder of Ascentius Consulting.
Dual CEO structure
One of the problems with Wipro, which it has finally addressed, was the dual CEO structure. For the last three years, it had two joint CEOs in Mr Girish Paranjpe and Mr Suresh Vaswani. Now, the company has moved to a much more traditional model by elevating Mr TK Kurien as the sole CEO.
“Forget about the IT industry, the concept of a dual CEO has not even worked in traditional industries such as manufacturing. This model does not train the gun on any specific person and that has been telling on the company’s performance,” said Mr Shende.
All these factors played on the Wipro scrip, pulling it down by 4.59 per cent to close at Rs 456.05 on Friday.
According to Mr Shende, TCS and Cognizant are the only companies to have fully recovered from the post-Lehman blues. However, the silver lining for Wipro was its performance in Europe where it registered year-on-year growth of 28.2 per cent and sequential growth of 16.2 per cent.
Europe, which was slow in coming out of the economic meltdown, now seems to be on the rebound for the industry as other three IT majors also reported revenue growth of between 15 per cent and 25 per cent there. All frontline software exporters seem to have done in the Americas, registering growths between 13 per cent and 28 per cent.
As for Infosys, Dolat Capital is of the view that the quarterly performance has been below par and the only positive cue emanating is the sustained pricing growth suggesting improved outlook and upscale in the value chain. Infosys, which has traditionally enjoyed the highest operating margins among the top five players, reported flat margins of 30.2 per cent.
Do clients really look at the nuances of their vendor’s financial health?
“We spend a lot of time in India trying to split hairs between a TCS, Infosys and a Wipro. What matters for clients is which vendor is able to deliver the kind of services they require,” said Mr Sid Pai, Managing Director of outsourcing advisory company, TPI, in India.
Mr Shende believes that large clients look at the margin structure of their vendors. If the overall margins structures are high, there could be a tendency to increase volumes at the cost of pricing when the deal comes up for renewal.