IT companies are logging in high growth

IT companies are logging in high growth

IT professionals working at the CBaySystems facility in Bangalore.Sridevi Gupta is on cloud nine. The 23-year old engineering graduate from Lucknow,  working for an Information Technology (IT) company in Bangalore for the last two years as a software engineer, is also a little confused. She has three job offers - two from Indian operations of American companies and one from a top five Indian IT firm, but is finding it difficult to decide which one to  accept. “All three are good offers, have good career prospects and have promised to send me abroad on projects,” she said, admitting that she is seeking advice from her seniors to zero-in on one. She, in fact, had more offers but has rejected those where the final gain in compensation package was less than 30 per cent than her present job.

Sridevi Gupta is not alone. Software engineers in India, with at least two to three years of experience, are in great demand, thanks to the revival in the fortunes of the Indian IT industry. Rising from the ripple effect of the global recession from 2008 till the middle of 2010 that adversely impacted hiring of engineers, Indian IT companies are now on a massive hiring spree. Salaries too are skyrocketing as companies are vying with each other to hire and retain the best brains.

Just sample the following: at the time of its recent announcement of quarter 3 (Q3) result, the country’s largest IT firm TCS said it will hire 62,000 to 65,000 people in the financial year 2010-11 as against the company’s earlier projection of 50,000 gross additions during the year. “With this, TCS’ headcount will be more than 200,000 at the end of March 2011,” said TCS Vice-President and Global Head Human Resources Ajoy Mukherjee at the recent result announcement press meet in Mumbai. 

Plenty of jobs

The other big IT firms like Infosys Technologies, Cognizant Technology Solutions, Wipro, HCL Technologies etc are also ramping up their talent pool in a big way. In fact, the top five Indian IT companies are projected to hire between 1,60,000 and 1,80,000 people in the current financial year according to Infosys CEO Kris Gopalakrishnan.

In his recent address at a seminar, Gopalakrishnan said, “Growth is back and most companies are hiring in large numbers again. Such large scale hiring was last seen in 2007 when 4,00,000 new IT jobs were created.” However, job creation dropped to 1,50,000 in 2009 and to 1,00,000 in 2010. The IT industry as a whole will employ around 20 lakh people in the current year, he said.

The new job creation will ride on huge campus recruitment drive companies are planning. TCS, for example, plans to hire 37,000 engineers from engineering colleges in 2011-12, 13,000 more than the current financial. Similarly, nearly half of Cognizant’s planned hiring of 25,000 employees in 2011 will come from engineering colleges. Cognizant’s total employee strength has already crossed 1,00,000 in December 2010. IT companies are hiring freshers in droves to keep the overall employee cost low as freshers cost much less than lateral hiring of experienced people from other companies.

As poaching has returned with the growth, IT companies are also working out new plans to meet the challenge of retaining existing workforce. TCS, according to Mukherjee, has already introduced the system of quarterly promotions of deserving junior employees and from January this year has re-introduced the system of two cycles of promotions for the seniors, one in January and the next in July. Infosys, which has nearly 1,30,000 employees on its payroll, has already hiked salaries by 17 per cent this year and plans to give another wage hike in the next three months.

Strong profits

Apart from increased hiring, the turn around in Indian IT industry is also visible clearly from the financial results of top IT firms in the quarter ending December 2010. Thanks to a general improvement in IT spending by firms in the USA and Europe, the Indian IT companies on the whole are making larger profits, having less pricing pressures and are exploring new areas for faster growth.

Wrote a recent research report by Kotak Institutional Securities, “We remain positive on strength and sustainability of demand upturn for the Indian IT services industry. We see strong demand tailwinds for 2011-12 building up in the form of improving pace of decision making, greater conversion of IT budgets into spends, release of pent-up discretionary spend, deal-size sweet spot for Indian names, improved new deal flow across verticals and good potential for a pricing uptick.”

Let us have a quick look at the financial performance of some of the tier-1 IT companies. Leading the pack was the largest IT company TCS whose revenue in the December 2010 quarter at Rs 9,663 crore was 26 per cent higher than the same quarter previous year and its net profit for the quarter at Rs 2,370 crore was 30 per cent higher.

The second largest company Infosys also witnessed 24 per cent jump in revenue and 14 per cent jump in profits. Except for MindTree, all companies listed in the table have
achieved marked improvement (of varying degree) in revenue and profit growth.

Structural changes

Close analysis of the IT companies results in the last three to four quarters throw up an interesting finding that despite seasonality in IT orders and fluctuations in the currency rates, Indian IT industry is slowly undergoing structural changes for the better. 

The leader TCS, for instance, has been constantly working on margin improvement driven by multiple initiatives such as closing down sales offices, consolidating delivery centres, raising sales productivity and linking sales incentives more intricately to profitability.

According to a Research Report by CLSA Asia-Pacific Markets, TCS has well distributed the overhead cost of sales and administration by making more revenue from large clients.

By mining large clients more, it has significantly increased the proportion of revenue generated from million dollar plus clients to around 46 per cent in December quarter from around 40 per cent ten quarters ago. Said TCS Chief Executive N Chandrasekaran at the recent press meet announcing Q3 result, “We have followed a disciplined pricing strategy and also invested ahead of the curve. All these have brought market agility, improved efficiency and shored up margins.”

In this context, the CLSA report said, “This is symptomatic of the greater focus on mining clients which in itself has led to improved cost management. TCS has also substantially improved on revenue per client metric and is currently at US$9m, a greater than 50 per cent jump from the recent bottom in Mar2009 quarter.”

While large IT companies like TCS, Infosys, Wipro continued to acquire large number of new clients they maintained large proportion of revenue from top clients: TCS got 30 per cent of revenue from top ten clients, Infosys got 25 per cent while Wipro got 19 per cent.

Growth is back

While better pricing realisation and cost containment has helped, Indian It companies have also shown good volume growth. Infosys’ volume growth in the last five quarters was 5 per cent and that of TCS was 6.5 per cent. Said Gopalakrishnan in a recent interview after result announcement: “We are expecting significant growth in verticals like retail and BFSI.”

Another important indicator of market improvement is that the discretionary spends by the IT clients are coming back after the recession when they almost came to a standstill.

While the conventional cost arbitrage opportunities will continue to drive volume growth for IT vendors, discretionary expenditures on consulting, enterprise solutions, package implementations, etc, are coming back. “We are seeing that companies have started focusing on growth now as compared to cost during the downturn,” said Gopalakrishnan.

Conventional revenue streams like application development and maintenance (ADM) which used to account for 80 to 90 per cent of the revenue for Indian IT companies are now down to around 50 per cent.

For Infosys, for example, ADM accounted for only 38 per cent of the revenue in Q3 while complex but more profitable consulting and package implementation contributed 26 per cent of the revenue.  

But all companies were not equally efficient in cashing in from the turnaround after recession. The IT major Wipro disappointed its investors with weaker sales and profit growth of 15 per cent and 8 per cent, respectively (see table) from its IT services. The main reason, as analysts pointed out, was Wipro’s excessive focus on margins. During the recession time Wipro did not accept many banking and financial sector (BFSI) projects yielding lower margins than was acceptable to the company. But when the market started picking up BFSI sector was the first to bounce back and Wipro missed out on opportunities.

Wrote a J P Morgan research report on Wipro: “We know of several instances where Wipro made inroads into marquee clients only to cede ground for competition to penetrate such accounts and get them. Clearly, track record in multivendor situations must look up.”

Wipro Chairman Azim Premji also admitted to company’s slower response in a recent interview to a business daily: “We did not see the growth coming…like we saw the down turn coming. We missed the bus in terms of first two quarters. Our operating margins fell, … because we took the eyes off the ball in terms if operating efficiencies.”

While players may perform differently, it is certain that the fortunes of $ 60 billion IT and ITES industry in India are looking up. Big IT clients in the US and in Europe are on investment mode, the Euro crisis in Europe appears to be under control, major economies in the continent have returned to growth and most Asian countries are growing faster.

To cater to growing demand Indian companies need to tackle the supply side well. Yes, large scale recruitments are in vogue, utilisation rates of billable people have risen and companies are spending more money in training and skill development.

But high attrition rates, lateral hiring and wage cost inflation associated with demand pick up are going to eat into profits unless cost are contained effectively.

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