Sudin Apte of Offshore Insights and Partha Iyengar of Gartner discuss, on CNBC-TV18, the change of guard in the IT sector in the backdrop of Infosys declaring results today.
Q: Infosys has decided to hold back on any further quarterly guidance and they have cut full-year guidance to just 5%. Can this be taken as an indication that the situation will only get worse?
Apte: We have been stating that the IT market will grow only by 6-8% for the last six years. For the last five-to-six quarters, it has been clear that Infosys is not on the top of the band of the fastest growing companies in the industry. So, we were expecting Infosys to grow at 5-5.5%.
However, the over 1% shrink in revenues quarter-on-quarter (QoQ), and that over 7% drop in profitability comes as a surprise. I think there was a drop in revenues from financial services as well as Europe.
Another surprise is that quarterly prices have gone down by 3.7%. This means that on one side the company has initiated a discount and on other side, it has not managed to grow, which is surely a concern. Until now, Infosys protected its margin and compromised on growth.
Q: Partha, you clearly believe that this a change of guard in the IT sector? Is TCS the new IT bellwether?
Iyengar: Absolutely. The change of guard has been occurring for the past two-to-three quarters. The change is final and I would go as far as to say that we really should stop calling Infosys the bellwether of the IT industry as it does the IT industry a disservice. I believe that there are many company-specific issues regarding Infosys.
Q: The Infosys CFO that they are not trying to do anything to compromise the pricing, margins, not chasing volumes but what do you see in commentary because volume growth has stayed where it was, pricing pressure has really hurt them?
Apte: Pricing is another concern or pressure for every provider. Clients are in a tough situation, the budgets are very tight. So, clearly clients are not in a mood to pay the prices that they were paying a year ago or six months back.
We consistently see clients asking for discounts and as the competition flares up and some players willing to give discount compared to others, I think there is pressure on discounting which is clearly visible.
For a long time, we have seen that Infosys walking out of the deals, however in last one or two quarters they were little flexible. However, among the lot they are still tough on the prices, but pricing pressure is very clearly visible.
Q: Based on the commentary of both Infosys and TCS management, what is your assessment of how much pain is left as far as the next few quarters are concerned and what is the sense you are now getting for the sector?
Iyengar: If we use our demand insight, which comes from talking to clients that are framing their plans for IT services, I am clearly in the TCS camp in terms of demand showing signs continuous expansion. Across verticals TCS numbers have seen healthy growth.
What provides to the context of optimism is the fact that the numbers and the growth for the Indian industry is continuing to come out of not the big ticket discretionary items, which are under pressure across the globe but companies being under pressure to cut the business element of IT, which for most enterprises on an average constitute about 70-80% of their IT spend.
In most cases, they have no option but to continue to spend to keep the lights on and that is the sweet spot for the Indian providers.
Talking about discretionary spends causing lack of visibility or a demand side weakness is entirely missing the boat. The demand side is fairly strong and we see clients continually looking to increase their offshore component.
Q: What do you expect from Wipro? Do you expect Wipro to fall in the Infy camp or do you believe that this is perhaps going to be a different quarter for Wipro?
Iyengar: Wipro is in a state of transition from a management perspective. So, I am a little hesitant to place a strong bet on where Wipro will end up. But if I were to take a call, I would say it is likely to be closer to TCS than to Infosys.