IT majors Tata Consultancy Services (TCS) and Infosys have declared their first quarter results for the Financial year 2017-18. The areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Data and Mainframe Modernization, Cyber Security and IoT Engineering Services and Artificial Intelligence (AI) have witnessed growth. However, the revenue from these segments is not significant enough to drive double digit growth for the big companies as traditional software development was the main driver of growth for a long period in the past. The biggest headwinds for the Indian IT companies has been the lack of acceleration in demand from the financial services segment, which is its largest revenue contributing vertical.
Infosys’ performance was relatively better as compared to rival TCS, which reported muted numbers on the back of slower growth from clients in banking and financial services and retail.
Geographic Revenue Growth
The revenue growth across North America and Europe has stagnated to a significant extent for the IT majors. Developed countries contribute chunk of the revenues for Indian IT companies. To be specific, for Infosys North America grew by 1.3% both sequentially and in constant currency, Europe grew by 4.7% sequentially and 3.1% in constant currency, India grew by 14.2% sequentially and 11.2% in constant currency, Rest of the world grew by 7.3% sequentially and by 6.9% in constant currency. India as a domestic market seems to be exhibiting double digit revenue growth in constant currency while North America and Europe show lower single digit growth.
TCS does not give any revenue guidance but Infosys which does give it has retained its guidance for constant currency revenue growth at 6.5% – 8.5% for the FY 2017-18. Considering that constant currency growth has been reported at 2.7% for Q1FY18, revenue growth for remaining quarters has to be much higher than the current scenario. If situation worsens in the time to come Infosys may well further reduce its guidance to lower figures.
New Services Scenario
The share of revenue from digital transformation has increased to 18.9% in Q1FY18 from 15.9% in Q1FY17 and 17.9% in Q4FY17 for TCS. The year on year growth in revenue has been 26% for the Digital business and 7.6% on a sequential quarter on quarter basis for the Company. This clearly shows the trend and the nature of the fast-growing digital segment of the IT sector but for big companies such as TCS the volume is still low to meaningfully account for significant growth. For Infosys the new services business which comprises of areas such as Cloud Ecosystem, Big Data and Analytics, API and Micro Services, Data and Mainframe Modernization, Cyber Security and IoT Engineering Services and Artificial Intelligence accounted for 8.3% of the revenues.
The total employee strength at the end of Q1FY18 was 385,809 on consolidated basis with gross addition of 11,202 and net addition of -1,414 employees during the quarter for TCS. This indicates there was a decline in the net addition of employees to the extent of being negative which means the total number of employees reduced from the fourth quarter of FY17 for TCS. Infosys also witnessed the same trend with total headcount lower than the last quarter of FY17 at 198553 with net addition of -1811 employees in Q1FY18. Employee utilization a metric to indicate the people billed on customers stood at 84 per cent which is the highest so far.
The unfavorable movement of the USD against the INR has also been responsible for lower revenue growth and profitability for IT companies in Q1FY18. The INR has appreciated against the USD on a year on year basis and TCS and Infosys have reported lower revenue (in INR terms) and profits as a result. The average dollar value was at Rs 64.46 in the first quarter, compared to Rs 66.94 during the same period last year. EBIT margins in the first quarter have either remained stagnant or reduced primarily due to rupee appreciation, wage increases, and visa costs for TCS and Infosys.
It looks like headwinds would continue for the Information Technology industry in the near future with factors such as wage hikes, visa costs, unfavorable currency movement, tepid growth from traditional software development space not supporting the companies.