Key Highlights
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Movement in BSE IT vis-à-vis BSE 500 (Q4 FY09) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Snapshot There was significant volatility in the prices of IT stocks and the returns from BSE IT Index in Q4 FY09. All major IT companies posted positive growth but the sector saw lack of accord in pricing growth and hiring. The current economic downturn may not be so tough on the country's top three IT companies – Tata Consultancy Services, Infosys Technologies and Wipro for their balance sheets show the top three are sitting pretty on healthy reserves and surplus to more than tide over the crisis. The reserves and surplus head in a company's balance sheet covers retained net profits over the years, besides the share issue premium, For companies in the manufacturing sector this reflects the fixed manufacturing assets but for IT companies liquid assets such as cash and equivalents, sundry debtors and loans and advances make up to as much as two-third of the reserves and surplus. In the Q4 FY09, most Indian IT companies saw their traditional revenue sectors like financial services, manufacturing, retail and telecom decline. However, the health care sector is now looking up and is expected to grow fast in the months to come. There are also signs of the banking and financial majors loosening their purse strings, but rather than outside parties they prefer to move the work to their captive units. Once the economy revives, growth the financial services sector will become the prime diver for growth. For IT services vendors existing clients drive much of their growth with repeat business accounting for a major chunk of the revenues. If the economy does not falter, these companies see a semblance of normalcy by year-end. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
IT in Q4 FY09 IT Q4 was forecasted to be the worst-ever quarter for the Indian IT. Top IT companies were forecasted to report the worst-ever sequential growth in revenues and profits for the March 2009 quarter. However, major Indian IT companies posted healthy growth despite a tough economic climate. Though the Indian IT Inc’s growth projections for the year 2009-10 and fall in employee hiring exhibit recession pangs, the strong client pipeline and growing vertical base mirrors their resilience. India's largest software exporter Tata Consultancy Services (TCS) registered a consolidated net profit of Rs 1,352.34 crore, up 7.58% year-on-year, for Q4 FY 09. Revenues increased to Rs 7,171.77 crore, up 17.61%. However, on a sequential basis (quarter-on-quarter) profit declined 2%. The company reported forex loss of Rs 192 crore for the quarter. TCS witnessed pricing pressure with a decline of 44 basis points across FY09 and expects a lower single-digit impact on the pricing next year as well. The company added 36 new clients in the current quarter as against 41 in the previous quarter. The company closed seven large deals, and is tracking 20 large deals. At the end of fiscal 2008-09, TCS employee count stood at 1,43,761. The company reportedly made 24,885 campus offers for 2009-10. The fourth quarter saw a net addition of 13,418 to the company's resource pool. The company expressed cautious optimism that profits for the fiscal 2009-10 will rise on an year-on-year basis. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BSE IT index companies performance for Q4 FY09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Infosys registered a 29.14% rise in the fourth quarter profits. The company posted revenue of Rs 5,635 crore for Q4 FY09 showing a growth of 24.06% year-on-year basis. For FY09, the company posted a total income of Rs 21,693 crore recording 30% growth. The pricing for the quarter declined by 3% and the company said that it witnessed over 2% drop in its blended pricing on a sequential basis during the March quarter. In terms of client additions, Infosys added 37 new clients but also lost four clients. However, the deal pipeline continues to be fairly strong for Infosys. Cautioning that the business environment continues to remain challenging, the company said that 89% of its clients have seen a cut in IT budgets, with nearly 60% seeing a 10% reduction. For FY10 Infosys forecasts a revenue growth of at least 1.7% to a minimum of Rs 220.66 billion, but earnings per share could fall by between 3.3% and 7.6%. Infosys hired close to 5,000 employees in the first three months of this year, but net additions were just 1,772 after taking into account attrition and other factors. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
IT on the Bourses | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The BSE IT Index has given a return of 2.59% in Q4 FY09 outperforming the BSE-500 which gave a negative return of 2.04%. The quarter witnessed a significant price fluctuation in the IT sector. The IT index offered a maximum return of 20.75% between its highest & lowest levels. It witnessed its highest level of the quarter at 2,400.35 on 7th January while it was the lowest on 24th February at 1,987.81 where as BSE-500 moved 31.21% between the highest and the lowest prices.
In the month of January, BSE IT showed a positive movement of 0.38% where as the BSE-500 underperformed giving a negative return of 4.73%. During March both BSE-IT and BSE-500 gave better returns when compared to remaining months of the quarter. BSE IT outperformed BSE-500 giving a return of 9.04% where in BSE-500 gave a return of 9.02%. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Performance of IT index stocks on BSE in Q4 FY09 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Satyam Saga… The Satyam saga unfolded during the quarter and came as a shock to everybody when Satyam's chairman Ramalinga Raju on January 7, 2009 resigned the company and admitted fraud of reporting inflated figures in the accounts of the firm. As per the announcement, Satyam's balance sheet as on September 30, 2008 had inflated cash and bank balances of Rs 5,040 crore, inflated debtors of Rs 490 crore and non-existent accrued interest of Rs 376 crore. Against this the liability was understated by Rs 1230 crore. Raju said the Q2 FY08 results had overstated operating revenues by Rs 588 crore, thereby overstating the operating profits and cash to that extent. Raju said in the last 2 years a net amount of Rs 1230 crore was arranged to keep operations going. The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones, and that Maytas's investors were convinced that this is a good divestment opportunity and a strategic fit, said Raju. The scrip declined from Rs 170.75 on 31st December 2008 to 38.35 on March 31, 2009. World Bank bars Wipro, Megasoft from deals... The Indian IT industry’s reputation for good corporate governance took another knock with the World Bank revealing that it had also barred Wipro Technologies and Megasoft Consultants from receiving direct contracts from the bank under its corporate procurement programme. The restrictions on Wipro and Megasoft were imposed for, respectively, offering Bank employees shares and setting up a joint venture in China with a former bank employee. The multilateral institution had imposed a similar ban on Satyam Computer late last year for breach of confidentiality. TCS inks deal with Ducati… Tata Consultancy Services (TCS) has partnered with KPMG Advisory Italy for a multi-million dollar contract from Ducati Motor Holding to deliver technology-based services for several years that would help improve the Italian bike maker's customer responsiveness and business efficiency. To begin with, TCS would provide enterprise resource planning for Ducati and its multiple subsidiaries in Europe. Neither TCS nor Ducati revealed the deal size and its tenure. In a media statement, TCS said that KPMG would bring their local market competencies while TCS will bring its global network delivery model. India continues to top Gartner's list of 30 offshoring destinations… India and China continue to hold their ground as the leaders for offshoring services. Ten countries from Asia Pacific were represented in the 30 leading countries. These included the undisputed leader in offshore services - India and the greatest challenger in terms of potential scale – China. TCS inks USD 100 million deal with UK co 4U Group… TCS announced that it signed a USD 100 million agreement to provide IT services to a UK-based telecom company 4U Group, which runs Phones 4U. Under the agreement, TCS will provide a full-range of IT and business change services to 4U Group like service management, application support, maintenance, management and development, data centre and desktop services. Wipro, Infosys, TCS eye IT captives in Germany… Indian tech firms including Wipro, Infosys and TCS, apart from several others, plan to acquire captive information technology units of large outsourcers such as Volvo and Bosch in Germany, as they seek to increase their revenues from Europe and also get the most out of these customers’ total IT outsourcing budgets. At a time when these tech firms are seeing a slump in the demand for software services in their key US market, such captive deals in Europe will help them diversify. The IT services markets in Europe include UK (USD 50-60 billion), Germany (USD 40-45 billion) and France (USD 35-40 billion). | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Global Scenario India is likely to retain its tag as the back-office of the world, amid competition from its neighboring China. India is in a comfortable position as the share of IT and IT-based services in China's export revenues comes to only just above 3%, compared to over 26% in India. China should not be underestimated. However it has, two major structural disadvantages, which are command of the English language and the protection of intellectual property. China is unlikely to catch up with India in the medium term. While US and UK remain the dominant markets for IT-ITES exports, revenues from newer markets is also growing rapidly. Indian exports to the US and UK remain in top, while Japanese markets are likely to rise in coming years. Business from Australia too is expected to boost revenues. Indian firms are likely to witness increased revenues from a strengthening relationship with China, Japan, South Korea and other Asian countries. IT spending across the world may set back resulting from slow down in the US economy which would effect developing country’s IT industry which remain net exporters and earn revenue from exports. The overall melt down in global markets would in turn have a negative impact on technology stocks. IT spending growth in the US, which accounts for about a third of the total global IT spending, is expected to slow to 2.80%, from 6.20% growth last year. Spending in Asia is expected to be about 9%, the strongest region for growth, but still representing a slowdown from 15% growth last year. In Europe, IT spending growth will fall from 15% last year to 5%. Other destinations are becoming attractive for global work making it imperative for IT companies to increase their local market exposure. The larger companies are in a better position to cope with global market fluctuations and managing a stronger rupee, but for the smaller players things can be difficult, as competition for global IT work is also growing. Today Vietnam offers rates 20% cheaper than India with same quality for some services. Philippines is also an attractive low cost outsourcing destination. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Outlook The outlook for the Indian software in 2009 is “the toughest” ever seen. The story will be “not one of competitiveness but survival”. The massive reorganization in the US financial services industry which has led to closures, bailouts and mergers, is likely to lead to a cut in its IT expenditure by as much as 25% to 30%. The BFSI (banking, financial services and insurance) vertical accounts for a third of the revenues of India’s software services industry. IT budgets, not just for BFSI but across industries, which are normally fixed annually are now being set on a quarterly or even monthly basis. So client CTOs who will place the orders themselves do not know where they stand. Global semiconductor companies are looking at a revenue downturn of 20% to 25%. Thus, the outlook for both services and product firms is equally bleak. The outlook for consumer electronics has been hurt by both fall in overall consumer sentiment and rising unemployment. From chip makers to device makers Intel, Samsung, Sony and even Microsoft most have issued dire projections. The only exception is Apple. During the earlier crisis period of 2001-02, offshoring revenue growth had slowed, but in 2009 it is likely to be almost flat, negative in the first half and positive in the second half. The Indian industry will experience a pricing decline which will affect different players according to whether they have been commanding a pricing premium or not. TCS will not be hit on this score, but Infosys, which is used to a 10% premium, will be. Pricing pressure will be exerted from two directions – one, customers looking for price cuts and two, stiff competition between vendors chasing fewer deals. In this scenario, cost cutting will be the foremost driver and quality and customer support will take second place. Similarly, application maintenance and support will gain precedence over application development. Recruitment in India will be down to a modest 10% - 15%, mainly to take care of attrition. Firms like Infosys will meet the cost challenge by “refreshing the pyramid” (effectively replacing experienced hands with freshers). Compensation in the industry will rise by a nominal 3% - 4%. Challenges ahead… The software sector is predominantly export oriented with over 80% of revenues coming from exports. The US is by far the largest market for Indian software and services accounting for over 50% of total exports. This large dependence on a single geographical location spells high risk for the software sector. India's tech spending seen growing 17-24% by 2010… Asia Pacific's IT spending is expected to grow about 10-16% till 2010, beating developed markets. India and China, in particular, represent large untapped markets in the region. While India's IT spending is likely to grow between 17.6-24% by 2010, China would grow 10-13. This is in comparison to the 3.3-6.5% increase expected in global IT spending. Global IT R&D off-shoring to India to touch USD 21.4 billion by 2012…Research and development (R&D) off-shoring to India by international IT players, a USD 9.35 billion industry, is estimated to touch USD 21.4 billion by 2012, according to a Zinnov Management Consulting report, which adds that currently there are 594 R&D centers in India operating in SPD (software product development), embedded services and engineering services. Obama: new tax plans are bad news for offshoring… President Obama's recently announced changes to the tax code for US firms doing business abroad could have significant implications for US firms with offshore sites. Outsourcers will need to quickly assess how these changes will impact their operations, as they could lead to higher price points, reduce operational efficiencies and erode their long-term competitiveness. US President Barack Obama's recently announced intention to close tax loopholes that he feels permit US firms to send jobs overseas more easily should be taken as disturbing news for contact center outsourcers that have delivery centers in offshore locations like India. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tuesday, June 2, 2009
Sector Analysis : Information Technology
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