Analysis | What led to high growth in Q2 for IT firms?

Information Technology companies reported a strong performance during the second quarter with four of the top five companies posting double-digit growth in net profit aided by the weak rupee.

But that is not the only reason behind the double-digit growth. The companies have recorded good growth owing to large deal wins and rise in digital business this quarter.

TCS witnessed a 20.7% rise in revenues, while Infosys recorded 17.3%, HCL 19.5% and Tech Mahindra by 13.7%. However, Wipro lagged its peers with just 8% revenue growth.

If rupee fall had prompted the double-digit growth in profits and revenue, then Wipro, that sees 60% of its revenues coming in US dollars should have shown equal growth.

According to analysts, it is not just the rupee that has led to the jump in the IT firms' revenues. "The acquisitions made by these companies over the last five years have helped them increase their revenues," said an investment banker covering the IT space in India.

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Other than Wipro, which saw a 14% decline in its net profit, all the other IT companies in top five saw a double-digit growth in their bottom line, which had eluded them in the past many quarters. On its part, Wipro attributed its poor performance to client specific issues in the healthcare vertical.

Other than acquisitions, many analysts have also attributed this increase to the stronger deal pipeline and growth in the digital business.

“There have been some good client wins – large technology and outsourcing deals and largely from key markets. And the second is that lot of these IT companies have spent a lot on digital. So that is helping now, in terms of conversions. Both of these things have contributed to increased momentum in IT space,” according to Raja Lahiri, Partner, Grant Thornton India.

Lahiri’s assertion is vetted by the numbers. In the digital revenues, TCS led the growth with a sequential increase of 16.5%, followed by Infosys (12.7%). While, Wipro, that saw a dismal performance in the results this quarter, saw its digital revenues grow by a mere 5.7%.

As far as new deal wins are concerned, TCS won about $4.9 billion worth of deals in the first quarter and a similar amount of deals in the second quarter. On the other hand, Bengaluru-based Infosys, made deal wins in excess of $1 billion in Q1, and doubled the figure in Q2, while Tech Mahindra made new deal wins in excess of $550 million during the quarter.

On the other hand, though Wipro reported that it has secured its largest deal win in the Q2, yet, the dip in profit is primarily due to the payment of Rs 514.1 crore for the settlement with one of the key customers.

Despite this good performance, the stocks of IT companies have taken a beating in October, with 12.3% fall in the BSE IT Index that closed 14,036.71 points on Tuesday.

According to analysts, the IT stocks have taken the beating as foreign investors, who have withdrawn Rs 36,957 crore from Indian markets in October, are selling their holdings in India's IT companies.

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