The stocks have fallen but that may hide some good news. India’s IT sector seems to be back in the robust growth game despite recent market hiccups — if one looks beyond the obvious.
On the one hand, three of the four top software service companies — Tata Consultancy Services, HCL Technologies and Wipro — lagged market expectations. On the other, analysts say it was a case of expectations running ahead of ground realities in a mood of optimism.
The big takeaway after the din of the July-September second quarter dies is that No.2 IT exporter Infosys is back as a market darling under new CEO Vishal Sikka with a re-rating of its stock. TCS, which had stolen its thunder, now faces a new assault.
“It’s all well with the actual numbers. They have followed a pattern similar to the last quarter,” said Dipen Shah, head, private client group research, at Kotak Securities. “All the companies are saying both Europe and the US (two prime markets) are seeing demand.”
However, the lagging of the analyst estimates, which Shah called “half percentage point here or there” had its own impact.
In a fortnight during which top four IT companies announced their quarterly numbers, the BSE IT index shed 524 points or nearly 5%, when the benchmark Sensex gained 554 points or more than 2%, giving an indication how investors have viewed their earnings.
Sarabjit Kour Nangra, vice-president, research at Angel Broking, who has a “Buy” rating on TCS, says the market fall had more to do with valuations, while Infosys was clawing back under Sikka, who took charge in August from SD Shibulal.
“Sikka came in with a 5-year plan which people wanted to hear. TCS has said it will grow faster than Nasscom’s average industry rate” she said.
Shah said founder-chairman NR Narayana Murthy’s work over the past year in his second innings as executive chairman before handing the reins to Sikka also created some positives in cost-cutting.
Wipro’s CEO TK Kurien said his company’s moderate performance was on account of “headwinds in top accounts” but there was no contract loss to competitors as such.
“On the IT sector as a whole we are pretty bullish,” Nangra said.
Revenue and profit numbers for the quarter, and also hiring figures, seem to suggest a positive mood as well.
Nangra said each company was pursuing its own growth strategy to capitalise on an overall market rebound. While Wipro has been making niche acquisitions in new technologies, Cognizant (India-centric but US listed), had made a major healthcare acquisition in the latest quarter.
There is, however, some room for sobriety. The downturn in Europe — which is still not behind us, pricing pressures in the face of competition, and a rise in employee wages have moderated growth.
However, companies say they are not to blame for misplaced hopes. For instance, TCS is seeing broad-based growth across sectors and regions with a healthy deal pipeline, CEO Natarajan Chandrasekaran said.
“It is a performance as per what we had planned, especially in a quarter we had wage hike,” said Anant Gupta, CEO, HCL.
Kotak Securities’ Shah said HCL Tech’s big bet on infrastructure management proved to be a dampener as the segment has been growing slower.
The Indian IT industry is most likely to meet industry body Nasscom’s estimate of 13-15% export growth for 2014-15. But the heady age of 25-30% growth may never return.