Slowly, But Surely...

As third quarter results of Indian IT companies roll out, there is an
increasing feeling that things are looking up. As Infosys CEO Nandan Nilekani
said," We entered the year with uncertainty, but with clients now keen on
clarity of cost structure, we can say that the road ahead is visible."
Contrast this to what Chief Mentor Narayana Murthy had to say in October 2001,
"There is so much fog on the windshield…nobody has a crystal ball to say
what they will do."

At the time of going to press, five other companies had also declared their
results — Wipro, MphasiS BFL, Mastek, Geometric, and Hughes. Though some big
names like Satyam anda HCL were still to announce their results, indications
from those already in seemed encouraging. Profitability is up and most companies
have also shown significant amount of hiring this quarter — always a positive
sign. Besides, as Nilekani said, "outsourcing is now mainstream. We have
seen a lot more activity from verticals other than the banking and financial
services segment." Despite this however pricing pressure continues and the
big story is still about volume growth.

The numbers

First the big ones. At Infosys, net profit grew 24.4% year-on-year to Rs
256.31 crore while Q3 revenues jumped 45% y-on-y to Rs 958.64 crore. Infosys
attributed this growth in revenues to the "confidence" the company
enjoys with "large marquee" customers. Another reason attributed was
the growth in volumes, thanks to the increasing number of clients looking at
outsourcing their IT needs.

What is interesting is that the company saw a lot more revenue coming from
smaller billion dollar clients than ever before. An indication that though
revenues are growing, they are coming from a large number of smaller deals. Some
of the fallout of this was evident in the company’s sales and marketing
expenditure which more than doubled to Rs 73.6 crore from Rs 32.85 crore in Q3
last year. For the nine months ended December 31, the company had spent a
whopping Rs 198.02 crore on S&M expenses–50% more than their entire
S&M expense for the previous fiscal.

Wipro CEO Vivek Paul dubbed the quarter as a "boring" one, where
Wipro Technologies "achieved the goals that it had set for itself in the
previous quarter". Wipro Technologies had a revenues grew 9.7% sequentially
and 23.3% year on year to touch Rs 745 crores. PBT grew by 4.2 % sequentially
and 2.2% year on year to touch Rs 212 crore.

"We see sustained volume growth with prices stabilizing in the IT
services and growing volumes and with intense price competition in the IT
enabled services," said Azim Premji, chairman.

Similarly, Bangalore-based Mphasis BFL posted a third quarter net profit of
Rs 18.18 crore as compared to a net profit of Rs 12.91 crore in the previous
year registering an increase of 41 %. On a sequential basis, the net profit grew
by 12.7%. Consolidated revenue for the period jumped by 44 % over the same
period last year to Rs 115.95 crore.

The real surprise was, however, Mastek–whose net profit for the quarter
stood at Rs 16.26 crore against Rs 6.13 crore, posted during the same period
last year, a whopping 165 % rise!

"We are addressing with full force the challenge of progressing our
existing strategic accounts, particularly in the US. Having successfully
delivered the pilots, quite a few of these accounts have already increased their
business with us. In some accounts we see a ramp up over next few quarters.
Although much would depend also on the US economy & annual IT-budget
increases, our early successes do make us feel somewhat optimistic," said
Ashank Desai, chairman and MD of Mastek.

The only contrarian result so far has come Hughes Software, which has been
plagued by the ill health of its telecom clients.

Though revenues grew quarter on quarter, Q3 profits fell 21.4% from a year
ago. The company launched its BPO venture in the third quarter and has been
talking about diversifying into non-telecom sectors for quite some time now.

"The business environment is still a little bit challenging, and the
telecom sector is still facing pressures. We are putting together the core team
for banking and financial services. But we don’t expect any revenues from this
division in this current financial year," said HSS president and managing
director Arun Kumar.

The pointers

The results also threw up some pointers to the way the wind may blow in the
future. Indian companies are increasing their presence in areas like consulting
and package implementation. Infosys for instance got a good 16% of its revenue
from these two practice areas this quarter. Since both are larger onsite plays,
the company also saw its onsite revenues go up significantly from 50% to 55%–a
counter trend that other large players had begun to show last year.

Pricing pressure, however, remains relentless and a large range of
traditional IT services practices are getting commoditized.

Despite growth in revenues and profitability, Infosys recorded a 0.9% drop in
blended billing rates since Q2. Compare this with a 4.4% improvement in blended
rates in Q2.

On the BPO front, both MphasiS and Infosys added new heads as well as
clients. Infosys’ Progeon added 426 people on its rolls and has four clients,
one of which was acquired in Q3, from among IT services clients of Infosys.
MsourcE, MphasiS BPO arm, registered a revenue of Rs 26.22 crore representing a
growth of 347 % in the quarter as against Rs 5.86 crore in the same period in
the previous year and added three clients in the quarter. Wipro Spectramind has
reported revenue of Rs 56.4 crore with PBIT of Rs 14 crore. During the quarter,
Spectramind signed letters of intent with 4 new customers.

However, three of them had existing relationships with Wipro. The employee
number at Spectramind is up by 686 employees to 3,884 as on December 31, 2002.

Higher expectations

While the results look good, the market however apparently expected more.
For the first time in many quarters, Infosys stock actually dropped a good 7.5%
the day the results were announced. This despite the fact that the company had
once again raised it’s forecast for full year revenue growth. Though the
company also met its EPS forecast of Rs 37-38, analysts say the market expected
the company to significantly overshoot that figure.

That itself is an indication of the high expectations of the market which
sees the IT industry recovering from the downturn.

TV Mahalingam