Geographical Concerns- Two major consumer regions are reeling under adverse macro factors, which look partially out of control. Europe is staring at an energy crisis that is expected to spiral out into high inflation. Whereas the USA is looking at unprecedented interest rate increases fueled by very high inflation. This will in effect slow down both the economies. Considering these two economies roughly amount to three quarters of the revenues of Indian IT companies, we are sure to see some turbulence going forward.
Business Models- Indian IT companies have traditionally specialized in large-scale enterprise software (SAP, Oracle etc.) where they still have a robust cost arbitrage, which comes from tight cost control.
However, the demand itself is shifting towards newer software as a service and cloud offerings. Consulting led players such as Accenture and Deloitte have made huge investments and inroads into implementing and servicing these growth areas. They have made various acquisitions to plug in their portfolios and seem to be making all the right moves. Indian outsourcing firms have also ramped up cloud offerings but are struggling to build scale in newer technologies.
According to Mint, India (Article- Indian tech companies should get into quick adaptation mode)-
Tech is now a big part of what consulting firms do. Which is why they’re getting into the nuts and bolts of their clients’ operations—or at least boosting their capability to do so. McKinsey & Co, which in recent years has acquired more than 20 tech-related companies, hired Jacky Wright, previously Microsoft’s chief digital officer, as its first-ever chief technology and platform officer last month. Deloitte is aggressively recruiting coders and investing in training them on new technologies.
Buying Behaviour- Main buyers for the outsourcing firms are the in-house tech executives at large corporate clients. However, when it comes to deciding priorities, functional heads are increasingly calling the shots. These functional heads do not normally speak the tech language. This is where the consulting firms are making inroads through better relationships with the functional leaders.
A cursory look at the results of the top IT players in India for the JAS quarter reveals a decent performance but that is not uniform:
TCS' net profit for Q2 FY23 rose by 8% to ₹10,431 crore from the year-ago quarter and the company also declared a second interim dividend of ₹8 per share. TCS shares closed nearly 2% higher at ₹3,121 apiece on the BSE ahead of its Q2 results. (Source:Mint, 10th Oct 2022) Better than expected performance
IT services company HCL Technologies on Wednesday posted a 7 per cent year-on-year rise in consolidated net profit to Rs 3,489 crore for the September quarter and raised the full-year revenue guidance. The net profit stood at Rs 3,259 crore in the year-ago period. The revenue for the three months ended September 30, 2022, came in at Rs 24,686 crore, 19.5 percent higher than the same period the previous year. (Source:Business Standard 12th October 2022) Better than expected performance
India's second largest IT services company Infosys posted better-than-expected 11 per cent rise in consolidated net profit at Rs 6,021 crore for the September quarter and announced buyback of shares worth Rs 9,300 crore in Q2 of 2022. (Source:Business Standard 13th October 2022) Better than expected performance
Shares of Wipro Ltd plunged more than 6% to hit a 52-week low of ₹383 apiece on the BSE on 13th October's early trading session after the IT services major reported an over 9% drop in its September quarter net profit to ₹2,659 crore, weighed down by rising staff expenses and lower non-US earnings. (Source:Mint 13th October 2022) Did not meet expected performance.
Mint India reported that the entry-level position in the industry will be slashed by 20% in the next fiscal year starting April’23. This might give a breathing space in terms of margins but that might have an impact on growth in coming years when growth headwinds subside.
The India based IT players can inorganically plug their portfolio with newer technology capabilities through acquisitions of niche players. Other aspect is to train the existing employees on a mass level on the newer technologies.
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