Information Technology companies along with some of the Cement, Automobile and Telecom players have announced the results for the quarter ended June 2017. In the Information technology space Infosys, TCS, Tech Mahindra and Wipro have reported results while in the automobile space Maruti Suzuki, Bajaj Auto and Hero MotoCorp have announced results. Ultratech Cement, ACC, Shree Cement and Ambuja Cement in the Cement sector and Bharti Airtel and Idea Cellular in the Telecom sector have reported quarterly earnings.
Valuations continue to be on the expensive side for most of the Automobile OEM stocks and Cement companies due to positive outlook for the sectors.
Information Technology
IT majors Tata Consultancy Services (TCS), Infosys, Wipro and Tech Mahindra 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.
Revenue Guidance
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.
Employee Metrics
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.
Currency Movement
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.
Telecom
Telecom Companies continued to report decline in revenues and profitability as the competition has intensified further. The launch of offers from Reliance Jio has made it inevitable for other players in the industry to reduce overall tariffs to sustain the existing market share. Losses continue to extend for companies like Idea Cellular on a year on year and quarter on quarter basis while Bharti Airtel even though in profit has reported a decline of 80% in profit after tax in the first quarter of FY 2017-18.
Total wireless subscribers increased by 0.53% to 1,180.82 million at the end of May from 1,174.60 million at the end of April. Reliance Jio continued to lead the growth momentum with net addition of 4.7 million new customers accounting for about 75% of overall net subscriber addition in the mobile services segment.
Reliance Jio was followed by Bharti Airtel which added 2.09 million new customers, state-run Bharat Sanchar Nigam Ltd, or BSNL, (1.35 million), Vodafone (1.13 million) and Idea Cellular (0.19 million). Aircel and Reliance Communications added 0.17 million net subscribers each. Loss of subscribers by Tata Teleservices (2.1 million), Telenor (1.32 million), Sistema Shyam (0.25 million) and Mahanagar Telephone Nigam Ltd, or MTNL, (2,136) mitigated growth in the mobile services segment.
Top five service providers constituted 88.23% market share of the total broadband subscribers at the end of May 2017. These service providers were Reliance Jio Infocom Ltd (117.34 million), Bharti Airtel (53.30 million), Vodafone (40.43 million), Idea Cellular (24.63 million) and BSNL (21.59 million).
Cement
Some companies in the Cement space have reported quarterly results for the quarter ended June 2017. Ambuja Cements, ACC and Shree Cement have reported high double digit growth in revenues and profitability.
The demand scenario continues to remain optimistic in the northern and eastern region of India due to increase in the number of Infrastructure projects. The demand for affordable housing and Metro and Rail projects is expected to maintain demand for cement in most of the regions in India.
The price to earnings ratios for Ambuja Cement, ACC, Shree Cement and Ultratech Cement continue to be in the range of 40 to 55 in the current scenario. The valuations continue to remain expensive for most of the cement companies as further uptick in demand is expected due to infrastructure projects and affordable housing.
Automobiles
Maruti Suzuki, Bajaj Auto and Hero MotoCorp have declared results for the quarter ended June 2017. The month of June 2017 was a relatively tough period for the Automobile industry as prices decreased in the month of July 2017 due to GST transition.
Growth in sales, including those of pricier models and higher non-operating income from cost reduction efforts contributed to the increase in profits for Maruti Suzuki India in Q1FY18. The costs were impacted by higher raw material prices and sales promotion and marketing expenses. There was also a one-off impact of compensation to dealers on account of switch to the Goods and Services Tax.
During the three months that ended in June, the maker of the Brezza compact SUV and the Baleno hatchback sold a total of 394571 vehicles (including exports) up 13.2% over the same period a year ago. The growth is expected to pick up after the transition to GST regime as organized sector is expected to benefit from it.
Segment leader Hero MotoCorp sold 1.85 million two-wheelers during the quarter as compared to 1.74 million units sold in the first quarter a year earlier. Going ahead, recovery in the rural sentiments, slew of product launches coupled with increased presence in new export markets would drive Hero’s volumes and earnings growth.
There was a one time compensation given to the dealers by the OEMs to cover the impact due to transition to GST and hence the profitability has been muted as compared to the last year same quarter for the industry.
The Union Budget announced tax cuts for the Rs.2.5 lakh to 5 lakh slab which would increase the disposable income in the hands of the middle class people. The implementation of the 7th Pay Commission and decent monsoon in the year should give a boost to automobile demand in the near future and help for the lost ground due to GST transition.
