Monday, October 30, 2017

Bad news for Indian I.T


Indian IT services companies have been struggling amid a shifting technology landscape, changing client demands, and protectionist policies in the US. This became quite evident over the last two weeks as the latest round of quarterly financial results trickled in.
Most firms recorded tepid growth in the July-September 2017 quarter (Q2) of financial year 2018 and shared a sombre forecast.
Here are some highlights from the financial results:

The struggle

Despite it being a seasonally strong quarter, Tata Consultancy Services (TCS), India’s largest IT services company and a sector bellwether, posted a lower-than-expected 1.7% quarter-on-quarter revenue growth. The Q2 figure stood at $4.74 billion, compared to $4.59 billion in the previous quarter.
This was  the 12th straight quarter in which the Mumbai-based firm has either underperformed or, at best, matched analysts’ estimates. TCS used to be a consistent out-performer earlier. In a post-earnings report, HDFC Securities described TCS’s Q2 revenue growth as “uninspiring” and called out its performance in core geographies as “sub-par.”

Bleak future

On Oct. 17, Wipro, India’s third-largest IT services company, toned down its revenue growth guidance for the October-December quarter (Q3) to just between 0% and 2%. This is slower than the 2.1% revenue growth (pdf) it clocked in Q2.
And Wipro is not alone. On Oct. 24, India’s second-largest IT company, Infosys, slashed its targeted revenue growth for FY18, hinting that the year is turning out to be worse than expected. The company now believes its revenue will grow between 5.5% and 6.5% (pdf) in FY18, as against 6.5-8.5% that it had guided for in July.

Trump threat

The Indian IT sector has been under pressure ever since Donald Trump was elected US president in November 2016. Trump’s protectionist views are a threat to India’s IT industry which massively relies on its low-cost workforce for its largest market, the US.
The Trump administration has already begun clamping down on the H-1B, the long-term visas that Indian IT companies mostly use for their personnel travelling for onsite tenures. Apprehensions over US visa policies continued to show on the Q2 earnings, with most firms increasing local US hiring.
TCS now ranks among the biggest job creators in the US IT industry, while 50% of Wipro’s employees in that country are now locals. Over the next two years, Infosys will hire 10,000 Americans. Meanwhile, mid-sized player Tech Mahindra said it has increased its staff strength at its Atlanta office by 100.
This is bad news for their balance sheets that are already bearing the weight of tough competition and tight client budgets. Hiring locals will add pressure on margins which have so far been maintained because of the low-cost Indian workforce.
Infosys was also among those hit by the move. In 2016, the Royal Bank of Scotland shelved plans to set up a separate bank in the UK, a project that was to be partnered by Infosys. Following RBS’s decision, Infosys lost around $50 million in revenue and had to shift 3,000 employees to other clients.

Brexit impact

Indian IT is also struggling in its second-largest market, Europe, thanks to Brexit.
Take, for instance,Bengaluru-based Mindtree, which acquired UK-based consultancy firm Bluefin in 2015. In June this year, the company said Bluefin was not growing in line with expectations due to a volatile business environment following Brexit.



More recently,in Q2, HCL, India’s fourth-largest IT services player, was hit by the post-Brexit currency fluctuation. “There has been some change in currency, so there are just the currency translation impacts,” CEO C Vijayakumar said.

The saviour

However, here’s the good news:There’s money coming from digital services like artificial intelligence (AI), automation, and internet-of-things (IoT)—verticals that Indian firms have built up over the past decade as the old cost-arbitrage model fell apart.
“We started training our employees on digital skills a couple of years ago and this focus has contributed greatly to our growth,” Ajoyendra Mukherjee, the executive vice-president TCS, told the Business Standard newspaper. In Q2, TCS’s revenue from digital services grew over 30% year-on-year.
Infosys attributed 11% of its revenues to digital or new technology services like cloud, data analytics, cybersecurity, and IoT.
At Wipro, these newer verticals accounted for 24% of the revenue. This share is only expected to grow in future. “Now, digital is pervasive across all customers,” Wipro CFO Jatin Dalal told the Hindu BusinessLine newspaper. “These clients will not go back to the old kind of systems.”