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Earnings season ahead, IT firms stare at a slowdown
The earnings season for IT companies will kick off today. And considering that the IT major, Infosys along with peers Tata Consultancy Services (TCS), Cognizant and Mindtree, have lowered their guidance for the current fiscal (2016-17), the sector looks set for one of its worst financial quarters.
The earnings season for IT companies will kick off today. And considering that the IT major, Infosys along with peers Tata Consultancy Services (TCS), Cognizant and Mindtree, have lowered their guidance for the current fiscal (2016-17), the sector looks set for one of its worst financial quarters.
Besides, the impact of Brexit (Britain’s exit from the European Union) and lower spending by clients in the banking, financial services and insurance (BFSI) segment are also likely to take a toll on IT companies’ balance sheets. The UK and the US account for 60% of IT companies’ businesses, and the BFSI segment contribute 25% to 40% to the total revenue of TCS, Infosys and Wipro.
For Infosys CEO Vishal Sikka, the July-August quarter, the company’s second and Sikka’s ninth, will be particularly important. The big challenges facing Sikka and his team include a drop in revenue growth, pressure on margins mainly contributed by pricing issues, unfavourable currency movements and the ability to retain talent.
A few weeks back, Infosys reduced its revenue growth projection to 10.5% to 12% for the current fiscal, from an earlier 11.5% to 13.5%. Investors expect the company to further reduce it to 9% to 9.5%. The company is also battling its inner demons. There has been a string of exits in the last few months, and the company reported a 21% attrition rate last quarter, compared to 17.3% in the previous quarter.
Besides, the impact of Brexit is also beginning to show. “We are seeing the early signs. Clients are cautious and the RBS issue was part of that. There is caution in the pockets,” Sikka had said earlier. The company recently lost out on a multi-million dollar deal from Royal Bank of Scotland, also due to Brexit.
The current challenges faced by Infosys could directly impact its mission for 2021, by when Sikka hopes to make the company a $20 billion(from $9.5 billion now) company. He hopes to increase operating margin to 30% from 26% now, and revenue per employee to $80,000 from around $50,000.
Last month, TCS warned that due to lower spending by clients in the BFSI segment, the second quarter growth could be affected. India’s largest software exporter does not give revenue guidance numbers. It lost a ₹6,000-crore lawsuit in the US in April over allegations of intellectual property infringement and potential violations of data confidentiality.
US-based Cognizant Technology Solutions, which is not listed in India, but has three quarters of its 2.4 lakh employees in the country, had revised its guidance thrice during the year due to macro-economic factors in the US and Brexit . From 11% to 14% at the start of the year, the company has brought down its latest growth projection for the full (calendar) year to 8.5% to 9.5%. Last week, it lost $4.4 billion in market capitalization after it disclosed a corruption probe in the US, followed by the resignation of one of its senior-most executives.
Last week, HT reported that industry body, the National Association of Software and Service Companies, is likely to lower the revenue growth forecast for 2016 to 9%, from 10% to 12% at the beginning of the year.
