Wipro and HCL Technologies joined the list of Indian software companies reporting underwhelming results in a reflection of the industry’s struggles with volatile currency movements and the rapid transformation in the world of information technology. With the effects of cross-currency movements counted, Wipro said revenue in the fourth quarter shrank by 1.2%.
Wipro forecast that at best top line growth would be around 1% in the April-June period with the possibility that revenue could fall by 0.5%. HCL Technologies’ top line was unchanged from the previous quarter but its operating margin fell by 10.5%, sending the company’s shares 3.2% lower on the National Stock Exchange.
“These earnings are a reflection of much deeper transition going on; currency can be blamed for only a part of it (the performance),” said Partha Iyengar, head of research at Gartner India. He added that the next 6-8 months could see this trend gain momentum, as top outsourcing customers get to grips with their strategies for digital businesses.
India’s biggest software company Tata Consultancy Services has missed analysts’ estimates for top line growth in the past three quarters, and Bengaluru-based mid-tier company Mindtree reported some recent ‘softness’ in demand.
Analysts are of the view that information technology companies worldwide are just about beginning to get to grips with changes that include automation of codewriting and testing, cloud computing to deliver services over the internet and data analytics.
Indeed, earlier in April, technology researcher Gartner also predicted global technology spending dropping by 1.3% this year. “This is just the phase one of the transition. For most part, Indian providers have been transactional, now they need to look at sales quality and start having different kind of sales conversations,” Iyengar said.
Concerns about growth momentum
Software industry grouping Nasscom has already confirmed concerns about growth momentum in the sector and scaled down export revenue growth for this year to 12-14% from 13-15%.
Wipro has said that revenue will be in the range of $1,765 million to $1,793 million in the first quarter of 2015-16, which means that at the lower end it projects the top line could shrink. But chief executive TK Kurien said the good days lie ahead. “All I can say is that the next year will be better than this year,” he said. Wipro’s revenue grew by 7% in 2014-15.
Wipro recently appointed a chief operating officer in Abid Ali Neemuchwala and on Tuesday elevated chief strategy officer Rishad Premji to the board of the company in moves widely interpreted as preparations for transition — the former likely succeeding CEO Kurien and the latter following in the footsteps of his father Azim Premji as the chairman of the company eventually.
Neemuchwala, a TCS veteran, said his immediate priority is to “understand the spirit of Wipro” and then help run the business while Kurien focusses on “defining the future and changing the business.”
Shares of Wipro ended 2.2% higher on the National Stock Exchange ahead of the earnings announcement while those of HCL Technologies closed lower by nearly 3.2%, falling as much as 9.6% intra-day soon after the results. HCL Technologies, the fourth-largest information technology company, reported sequential fall of 12% in its third-quarter profit while revenue rose 2.7% in constant-currency terms, below analysts’ average expectation of a growth of 3.5%.
HCL Technologies’ weak performance in its third quarter was aggravated by softness in the retail sector where a big component of a large deal was completed in the previous quarter. Gross margins fell to 35.3% in the third quarter from 37% last quarter as a result of currency fluctuations.
Worst quarter for top IT companies
The March quarter is already proving to be the worst quarter in years for top Indian software exporters, with cross-currency fluctuations wreaking havoc on margins of companies. A stronger dollar affects the companies’ business in non-US geographies, as depreciating local currencies put pressure on revenue from these countries.
Last week, TCS also fell short of market expectations, posting its first quarter of negative growth in around five years, fuelling concerns over the performance of the $146-billion IT sector in the upcoming quarters. Siddharth A Pai, a partner and president for Asia-Pacific at outsourcing advisory firm ISG, was scathing in his assessment of Indian IT service providers’ performance and prospects.
Cross-currency movements, he said, cannot be an excuse for companies with a top line of over $15 billion — a reference to TCS — because hedging provides a degree of visibility. The big theme, he said, is that price wars are underway between Indian service providers and younger firms starting out with disruptive technology.
“These new vendors are pulling out the rug from under the feet of Indian service providers.” Iyengar of Gartner agreed that while there are challenges, the situation is by no means dire. “Even an 800-pound gorilla like IBM is showing signs of weakness. I am optimistic that Indian providers will figure out a way through this transition.”
