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Q2 Results Review: How top Indian IT companies fared in the quarter gone by

The pandemic both disrupted business for India’s IT companies and opened up new opportunities as the need for digitisation grew globally. Deals, clients and hiring were among the key trends that shaped their performance in the quarter ended September.

November 13, 2021 / 01:08 PM IST
4. Hyderabad | Weighted Average Compensation: Rs 8.5 lakh per year (Image: Moneycontrol)

4. Hyderabad | Weighted Average Compensation: Rs 8.5 lakh per year (Image: Moneycontrol)

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India’s top IT companies reported one of their best quarters in the three months ended September and are on track to register double-digit growth for the year as demand for digital services continues to rise.

Enterprises globally stepped on the gas on digital transformation as the world moved into a new normal last year after the Covid-19 outbreak. Technology is no longer just about driving cost-efficiency, but also about driving business.

Aviation and hospitality, the two sectors that were worst affected by the pandemic, are investing in contactless check-in facilities as restrictions are lifted. Retailers can no longer afford to ignore online shopping and are investing in IT to drive business. All these are opportunities for the Indian IT services sector.

A look at five key trends that defined the IT results this season.

Deals pipeline

The pipeline for contracts was strong in the quarter, although the mega-deals that were prevalent a couple of quarters ago were missing. According to executives, the trend of companies signing medium to large deals will continue.

Tata Consultancy Services won contracts valued at $7.6 billion and Infosys $2.15 billion. Wipro’s deal wins stood at $3 billion and HCL Technologies’ was $2.3 billion. The deals were a mix of small, medium and large contracts.

The bulk of the deal pipeline is in the range of $50 million-$200 million, HCL Tech’s CEO C Vijayakumar said on an earnings call in October.

“I wouldn’t call out any significant change to the overall TCV (total contract value) or the pipeline,” Rajesh Gopinathan, CEO of TCS, said during an earnings call. “For mega-deals, by definition, the frequency is different. And when you look at the pipeline or the TCV without the mega-deal, they are pretty much similar. It’s a good mix of both low duration as well as medium- to large-duration deals.”

Infosys said the company won 22 deals in the range of $50 million for the quarter and is seeing significant demand in digital and cloud deal space. Infosys won the largest deal in its history with Daimler in December 2020, which took the TCV to $7.13 billion.

“We have a good mix of large and medium-size deals,” Thierry Delaporte, CEO of Wipro, said during an earnings call. “In fact, many mid-size deals and slightly smaller size transformation deals are in the market right now.”

This trend prevailed for mid-tier tech companies as well. L&T Infotech said it had done many mid-size deals.

Explaining the lack of mega-deals, L&T Infotech CEO Sanjay Jalona said in a recent interaction that customer priorities today are all about dealing with digitisation needs for survival, about becoming more competitive in the marketplace and doing things faster, about the ability to save costs and about creating online systems and kerbside deliveries.

“It is not that large deals are completely disappearing. But look at what these large deals typically do – they are consolidation deals, where you are transitioning from one supplier to another in a defined way,” Jalona said. Consolidation is a little lower in priority for them, he said.

Client metrics

Another noted improvement in the second quarter was client additions. Apurva Prasad, vice president – institution research, at Elara Capital, said there was stronger growth in customer metrics as a result of efforts by companies on client mining and additions.

TCS added five clients in the $100 million category and 17 in the $50 million category. In total, the company added 178 clients for the 12 months ended September. “Our client additions were very strong across all revenue buckets this quarter, an important measure of the depth of our customer relationships,” Gopinathan of TCS said during the earnings call.

Infosys added 131 clients for the year ended September. There were five new clients in the $100 million bucket and two in the $50 million bucket. The revenue contributions from the top 10 clients increased to 19.4 percent in the quarter compared with 18.7 percent a year earlier.

Salil Parekh, CEO of Infosys, said the company’s large client base is expanding. “There is a huge amount of existing client base that we have, where we see incredible demand. This does not always come into the large deals bucket. It will be in different sizes – some are large and some are not. But a client that I talked to last week in a meeting with the CIO, we were looking at multiple thousand people expansion at a client where we already have an account base of over $100 million today,” he added.

HCL Tech’s $100 million clients was up by one and $50 million was up by 12 on a year-on-year basis. The top 20 clients contributed 30.6 percent in revenue, up from 29.9 percent in Q2 of FY21. The company said during the earnings call that its clients are investing heavily in various digital initiatives.

For Wipro, increasing the number of clients was a key focus area since Delaporte took over in July 2020. Wipro added 116 clients, up from 97 a year earlier. The revenue contribution from the top 10 clients increased to 20.1 percent in Q2 of FY22 from 19.6 percent a year ago. The company has increased the number of executives working with key clients globally.

Travel costs up

When the pandemic struck in 2020, travel came to a standstill as countries went into lockdown to stop the spread of the virus. Companies suspended business travel and meetings moved online.

More than a year later, with vaccination gaining pace, countries are opening up and business travel is resuming. As a result, travel costs that had dropped as much as 70 percent for companies are slowly climbing.

Wipro’s Delaporte, who lives in Paris, visited the company headquarters in Bengaluru officially for the first time.

“This is my first official visit to the India offices since I took charge in July last year. In the last three days, I met with our senior leaders and teams in India,” he said during the earnings call last month. Delaporte said he has just started essential business travel.

This trend is likely to continue and could impact margins. Nilanjan Roy, CFO of Infosys, said that though this might be a headwind, the company has a strong optimisation programme that will help offset these expenses.

Record hiring

The top four IT companies increased hiring, with record headcount addition in the quarter. After the top four recruited some 82,000 freshers in FY21, they added 53,964 employees in the quarter ended September, up from 17,076 a year ago.

Gopinathan of TCS had said that this strong demand environment was a “once-in-a-decade opportunity.”

IT companies, in step, have revised their outlook and are looking at double-digit growth. All these have translated into strong demand for skills like cloud architecture, cybersecurity, full stack development and AI/ML expertise.

TCS plans to sign up 78,000 freshers this year, instead of the 40,000 planned initially. It has already on-boarded 43,000 freshers. Wipro and Infosys have revised their hiring targets to 17,000 and 45,000, respectively, for FY22. HCL Tech plans to hire 22,000 freshers and made a record addition of 11,135 employees in the second quarter.

Attrition, supply chain woes

Even as companies ramp up their supply chains by doubling up on freshers, growing attrition is a concern for IT firms. The churn rate at TCS rose to 11.9 percent from 8.6 percent between the last quarters. Wipro and Infosys reported over 20 percent attrition and HCL Tech 15.7 percent. For the previous quarter, the attrition stood at 10-15 percent for these three IT companies.

Attrition may impact the ability of IT companies to take on new projects and execute them. Cognizant Technology Solutions Corporation CEO Brian Humphries said the company had to let go of some deals due to supply-side pressures.

L&T Infotech’s Jalona said the company would have grown faster if not for the talent crunch in the industry.

However, some executives from the top four IT companies said they are adequately prepared.

“Supply-side constraints will not impact our growth, which is a priority for us,” Saurabh Govil, chief human resources officer at Wipro, said during the earnings call in October. “This is the second quarter where at the company level we’ve added more than 10,000 people as a net headcount due to the higher attrition environment. We will continue to look at both freshers and laterals as our strategy. We added two-times more freshers this year and we will further increase it by threefold in FY23.”

Swathi Moorthy
first published: Nov 13, 2021 07:21 am