Prefer Infosys, Wipro from IT space: Prabhudas Lilladher
IT: Prabhudas Lilladher believes that higher utilization and spiralling attrition along with anaemic net employee addition is a matter of concern. It could impact the business momentum if we see acceleration in growth momentum. The research firm prefers Infosys and Wipro from the space.
August 27, 2013 / 13:04 IST
Prabhudas Lilladher research report on IT sector
We looked at the attrition, net hiring and utilization of Top-5 Indian IT companies (TCS, Cognizant, Infosys, Wipro, HCL Tech) in the most recent quarter (AMJ-13 - Q1FY14) to identify a possibility of rising attrition, a situation similar to H2FY10. The companies are slow on hiring despite improving demand outlook and rising utilization, a level similar to H1FY10. But, the increased contribution from Fixed Price Project, slow & steady economic recovery and off-campus talent surplus (due to weak hiring in FY11-13) provide latency time to respond to any eventuality. We continue to prefer companies with low utilization as recovery takes the centre-stage. Our preference for Infosys and Wipro stays.Top-5 companies have witnessed an attrition spike in Q1FY14. Despite seasonality, we see the attrition of 19.5% (highest in Q1 excluding Q1FY11) as higher than usual average. Moreover, utilization (incl. Trainees) for top-5 is 72.3% (a level breached only in H2FY10-H1FY11), is moving to an alarmingly high level. Nevertheless, the net hiring continues to remain weak since Q1FY10.Indian IT companies have managed to migrate their business model more towards FPP from 30.9% in Q4FY08 of overall revenue to 48.2% in Q1FY14. The higher contribution of FPP gives more manoeuvrability to the hiring process. Moreover, weaker hiring in FY12-13 resulted in latency of freshers in the job market, providing an opportunity for the companies to hire freshers off-campus as well.Indian IT companies are seeing demand improvement in CY13. However, the improvement in year-on-year growth is less steep than H2FY10. For Top-5, revenue momentum bottomed in Q2FY13 with 10.2% YoY growth and improved to 14.2% YoY growth in Q1FY14 compared to Q1FY10, when growth rate bottomed at 1.4% YoY and jumped to 17.9% YoY growth in Q4FY10. The slow & steady pace of recovery in CY13 leaves room for just-in-time hiring without spiralling up of attrition."Indian IT companies have successfully adapted their business model in the changing business environment. We believe that higher utilization and spiralling attrition along with anaemic net employee addition is a matter of concern. It could impact the business momentum if we see acceleration in growth momentum. We are seeing improvement in sales cycle. Moreover, clients are not pushing for the quick ramp-up of projects. As the economic recovery takes centre stage, we continue to prefer the companies that have latency in utilization. Preference for Infosys and Wipro stays," says Prabhudas Lilladher research report.Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. 
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