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The Way Ahead for the Indian IT Industry

Research Article by Mr. Joseph Jayakumar,Director Amstar Technologies

Since the start of the year until 12 April 2018, TCS shares have gained 16.2%; Infosys has gained 1.8% and HCL about 13.5%, while Wipro has lost about 8.5%. This makes it imperative for all of us as service providers about the Big 4 about where is the exact sign of recovery that we should all be aware of.

This January, top executives at India’s largest information technology (IT) outsourcing company’s forum had exuded optimism that 2018-19 was going to be a better year. Investors were convinced and shares of the four largest IT companies outperformed in the Sensex until 12 April 2018.

This has left analysts and trade experts wonder if the current financial year will be better for the industry than the last one. The prime reason being since the start of the year until 12 April, a day before Infosys declared earnings; TCS shares gained 16.2%, Infosys 11.8% and HCL 13.5%, while Wipro lost 8.5%. During this time, BSE Sensex hardly posted any return, gaining 0.13%.

However, two months into the current financial year, it appears many of these companies are grappling with unique challenges and that all of them will struggle to improve the growth reported in the last two years. The challenges being in training manpower, reskilling and governmental norms and regulations to name a few.

India’s tech giant Tata Consultancy Services Ltd has backed this trend so far. The Mumbai-based company has been receptive about it and its management is reaffirming to general public and analysts that it should be able to clock double-digit growth in the current year, leading to more brokerages putting a buy recommendation on the shares after it declared earnings on 19th April.

But fewer analysts are now bullish on Infosys, Wipro and HCL Technologies after the companies declared earnings at the start of the year. “Save for TCS, the question to be asked to IT companies is, where is the recovery?” Certainly, the growth outlook is not much better than last year. Even the management commentary is not cheerful as it sounded in January. So, what has really changed in the last four months?” is what makes the picture a bit queasy.

Where Infosys reported a 7.2% dollar revenue growth at 24.3% operating margin in the year ended March 2018. For the current year, the company expects to grow its dollar revenue between 7% and 9%, but at a lower operating margins band of between 22% and 24%, prompting some analysts to change their bullish outlook.

The same applies for Wipro and HCL as well.

It faced two client-related bankruptcies and the company’s planned restructuring in the Middle East and India is taking longer than chief executive officer Mr. Abidali Neemuchwala had anticipated thus dashing any hopes that Wipro will turn the corner positively soon.

Wipro also does not give full-year revenue guidance but expects quarterly revenue to be between a decline of 2% and growth of 0.2% in constant currency terms in the April-June period from the preceding quarter.

HCL Technologies, which reported a 12.4% growth last year, expects to grow its dollar revenue between 10.5% and 12.5% in the current fiscal. However, management expects more than half of this incremental growth to come from acquisitions and because of business brought from the company’s many intellectual property (IP) partnerships.

Worryingly for investors, all these companies are not struggling for revenue growth alone as a few analysts like Keith Bachman of BMO Capital Markets have expressed skepticism on the profitability outlook for them.

Till then it’s a “Wait and Watch” scenario where these tech giants are more concerned about reskilling themselves, smart sizing themselves, digitizing themselves on all fronts and being more stakeholder friendly where Amstar sees a huge potentiality and will try to provide an extensive swing arm in their reskilling initiative for the Big 4’s extensively.

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