Indian IT industry is coming up against the most severe crunch – one that endangers its very basics. Of course, the industry is passing through “difficult and structurally challenging time”, as openly accepted by Infosys CEO Vishal Sikka. The IT industry continues to feel the heat on account of a global slowdown, Brexit and changing dynamics in the software sector.
IT industry body National Association of Software and Services Companies (Nasscom) called Brexit declaration as a phase of uncertainty in the near term. Though, Nasscom said it saw a fusion of challenges and opportunities in the longer term. Some of the near-term consequences that Nasscom predicted on the technology and services sector include – a likely decline in the value of the British Pound, which could render many prevailing contracts losing propositions unless they are renegotiated; Indian IT companies may need to establish separate headquarters/operations for EU which may lead to some disinvestment from UK.
Undoubtedly, the Indian IT sector has slowed down due to which companies such as Tata Consultancy Services (TCS), Infosys, HCL, Wipro, etc are likely to post dismal Q2 results, pegged to be worst in a decade. Due to slow growth in banking and financial services, the top five Indian IT firms are expected to cut full year forecast.
Worst second-quarter performance
As said, India’s information technology sector faces its worst second-quarter (July-September) performance in eight years, a report by Kotak Institutional Equities has said. The report said revenues at the country’s largest IT companies are likely to grow between 0.5%-3% during the quarter compared to the previous one (April-June).
Growth was being affected and jammed by “broad-based” flaws in the banking, financial services and insurance industries as well as “weak healthcare and delays in projects across many clients”, the report said. Infosys is projected to be the highest gainer with a 3% rise in revenues, while HCL Technologies will gain by 2.6%. Tata Communication Services and Wipro are expected to grow by 2.4% and 0.5% respectively, according to the report.
Infosys had lowered its guidance in July 2016; a further reduction within a span of three months highlights the fast deteriorating scenario in the market. Infosys’ Chief Executive Officer, Vishal Sikka, said, “I can tell you that the second quarter will be better. But we are seeing some risks that could lead to a downward revision of the guidance because the environment has worsened as we have gone into the quarter.”
Regardless of muted expectations, the September earnings season of Indian IT companies did not get off to a good start. India’s biggest IT outsourcer Tata Consultancy Services (TCS) thwarted by reporting just 0.3 per cent sequential growth in dollar revenues to $4,374 million.
Though Infosys reported better-than-estimated dollar revenue of $2,587 million in Q2, the Bengaluru-based outsourcer lowered its revenue growth guidance for the second time in three months, disappointing investors.
Commenting on quarterly earnings reports from Infosys and TCS, Sharekhan Associate Vice President Sanjeev Hota said the pain in IT sector is unlikely to go away soon and is likely to stay for one and a half years. “The issue (lower growth) is likely to stay for next one and a half years. TCS is still witnessing pain in BFSI sector, its largest sector in terms of revenue contribution. They are also witnessing pressure in the retail sector, which is one of the biggest sectors for TCS,” he added.
Mr Hota said the problem with the IT sector is not cyclical; rather it is structural and is likely to stay for next two to three years. “Every time the IT sector goes through a transition phase it takes 2-3 year to revive,” he added.
Frontline IT stocks have underperformed the broader indices over last six months. Infosys shares have fallen 12 per cent, while TCS shares corrected more than 6 per cent in last six months, compared to an 8 per cent gain in the broader Sensex.
Mr Hota said he remains watchful on IT stocks at the current juncture despite their valuations falling to attractive levels.
“It will be difficult to get a market outperformer from IT sector in next 8-12 months given the kind of muted growth they are going to deliver in FY17 and the visibility is still not there for FY18,” Mr Hota added.
However, Mr Hota is optimistic on Persistent Systems in the midcap IT space. “Persistent Systems derives nearly 50-60 per cent of its revenue from digital segment. It can surprise on the revenue and margin fronts,” he added.
Delayed payments create serious cash flow challenges : IT industry
Now this sector is turning out to be a real can of worms. Information technology (IT) vendors are moaning about difficulties in implementing government orders – from inflexible contractual terms to delays in payments – although both the centre and states are farming out more work to IT companies.
Take, for example, NIIT Technologies Ltd. In the June quarter, the firm reported a 47.5% fall in net profit due to a provision of Rs36 crore for dues it was yet to receive on a government contract, which been put on hold. The company’s India business declined 7.2% sequentially in the quarter to September because it earned lower revenue from the government. India now accounts for just 7% of its total revenue.
“It (India business) impacts cash flow because it is very difficult to collect money from the Indian government… by defocusing on Indian government, we have been able to dramatically reduce the outstanding that we have to the cash flow,” said Arvind Thakur, Chief Executive officer of NIIT Technologies.
Both the central and state governments have stepped up spending on IT and e-governance projects. Inflexibilities built into requests for proposals (RFPs), which don’t take into account the complexities involved in project execution, and delays in clearing invoices have offset the attractiveness of contracts.
Payment terms and conditions tend to be tilted towards the end of the contract period. The problem worsens in case the project has a significant hardware component that has to be delivered and installed early on in the project life cycle, according to lobby National Association of Software and Service Companies (Nasscom).
Delayed payments create serious cash flow challenges for industry, especially smaller and medium IT vendors, and can make projects financially unviable.
India’s third largest IT firm Wipro Ltd in September imperilled to initiate legal proceedings against the Employees’ State Insurance Corp. (ESIC), a government entity, due to non-payment of dues.
The company entered into a seven-year contract in 2009 with ESIC as a system integrator to set up a health administration programme for Rs1,200 crore.
“Wipro has completed its obligations under the contract. However, ESIC has withheld certain amounts due to Wipro in an ad-hoc and arbitrary manner, which has resulted in significant delay in collections for Wipro,” the company said in a filing to the BSE on 7 September
Wipro did not respond to emailed questions. HCL Technologies Ltd and Tech Mahindra Ltd did not respond to questions citing the so-called silent period ahead of quarterly earnings announcements. Emails sent to Infosys Ltd and Tata Consultancy Services Ltd remained unanswered.
The government awards contracts through L1, or the Least Cost Selection method. While L1 is the norm in procurement of IT hardware and software, there are other selection methods which should be reinvigorated taking into account the complexity and strategic position of the project, IT vendors say.
The industry has been engaging with the government to implement new RFPs and implement new methods of selection such as quality and cost based selection (QCBS), quality based selection (QBS) and fixed price bids.
Read this article KIIT University has set benchmarks in providing affordable and high quality education