September 07, 2012 / 14:49 IST
Background: In light of the recently announced 1QFY13 results, this article compares the quarter-on-quarter (Q-o-Q) revenue drivers of the Big 4 Indian IT companies, with a view to understand which of these drivers were sector specific versus company specific. The Big 4 are, of course, HCL Tech, Infosys, TCS and Wipro.
Revenue and its key components: Across the IT services sector, revenue growth can be attributed to the following factors/drivers:1. Volume (person hours worked),2. Realization/Pricing (the billing rate charged to customers),3. Utilization (the ratio of the total billable employees who actually worked on projects to the total number of employees available to work on projects for a particular period),4. Currency (the translation gain/loss that occurs while converting the revenue from the respective local currency to Indian rupee). The table below summarizes the results of the Big 4 based on the above parameters.Table1: 1QFY13, Q-o-Q growth of key parameters| Q-o-Q growth of key parameters | HCL Tech | Infosys | TCS | Wipro |
| Volume | 4.60% | 2.70% | 5.30% | 0.80% |
| Realization/Pricing | 2.70% | -2.90% | -1.20% | -0.50% |
| Utilization | -2.80% | -1.40% | 0.70% | 1.80% |
| Rupee against US $ | -10.00% | -10.00% | -10.00% | -10.00% |
Note: For HCL we used 4QFY12 as its last financial year ended in June, 2012.With reference to the table above, we note the following: Volume: While HCL Tech and TCS reported Q-o-Q volume growth to the tune of 4.6% and 5.3% respectively, Infosys's volume growth was sub-par at 2.7%. And, Wipro's woes continued with a volume growth of only 0.8%. For Wipro, 1QFY13 was in fact the third consecutive quarter in which it continued to underperform its peers with respect to volume growth. Realization/Pricing: The Q-o-Q pricing decline for Infosys was more pronounced at nearly 3%, while TCS and Wipro saw price declines of roughly 1% and 0.5% respectively. Interestingly, during the same period, HCL Tech saw a price increase of roughly 3%. Note: The Q-o-Q constant currency growth figures of each of the Big 4 IT companies and their respective figures for volume growth were used to calculate the effect on pricing. Utilization: Q-o-Q analysis reveals that utilization for Infosys and HCL declined 1.4% and 2.8% respectively. At the same time, utilization for TCS and Wipro registered increases of 0.7% and 1.8% respectively. These figures do not consider the deployment of trainees. Currency: The rupee depreciated by approximately 10% against the US dollar during the last quarter. The impact of this was uniformly felt across the Indian IT sector, including HCL Tech, Infosys, TCS and Wipro. Conclusions: Sector or Company Specific drivers? Volume: Our assessment indicates that volume growth has been non-uniform across the Big 4, and so it is more of a company specific rather than a sector-wide factor. Pricing: We believe that pricing decline has impacted the entire sector. In an earlier article we pointed out why pricing can affect the industry as a whole, and that Infosys may be setting the stage for a price competition. We hold that view even though HCL Tech has seen a price increase, while the other three companies have experienced price declines as expected. Utilization: This too seems to be company rather than sector specific with each of the Big 4 IT companies performing differently in terms of efficiency. While the relatively higher volume growth for HCL at a lower utilization is commendable, the sequential increase in volume and utilization for TCS appears to be on expected lines. Wipro seems to be doing its best to improve on the efficiency front, as its volume growth has been dwindling. And, Infosys's utilization seems to have fallen behind. Given the current challenging and competitive environment, we believe that the Big 4 IT companies will focus on volume growth, while compromising on the pricing front.Equitymaster.com is India's leading independent equity research initiative Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
