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Thursday, January 17, 2008

For IT, numbers say it all

Early Results of IT companies for the December quarter may not be as exciting as they used to be few quarters ago. The sector has lost some of its appeal after the rupee-dollar debacle and global subprime crisis. However, going by the latest quarter numbers of Infosys, iGATE Global Solutions and Mastek, one can conclude that even though the picture may no more be rosy for the IT sector, it's not too gloomy either.

Out of the three, Infosys and iGATE generate a major part of their revenues from IT services, while Mastek is in the solutions-led business. In that sense, Infosys and iGATE broadly represent the big and mid-sized IT services companies more than Mastek.

The first two also generate a majority of their income from the US market. Thus, their numbers — especially that of Infosys, the second biggest IT exporter from India — provide a quick window to the trend in the US market. Mastek, on the other hand, has a larger presence in the UK.

Both Infosys and iGATE have reported a moderate growth in sales and profits sequentially, following new client additions at higher billing rates. Infosys has added 47 new clients, four more than those in the same quarter of the previous year. iGATE also added three new clients during the quarter. This underlines the sustained demand traction in the IT outsourcing market, putting aside the concerns regarding global macroeconomic issues.

On the profitability front, both companies have fared well. Infosys reported a 1.2% rise in operating margin at 32.6% over the previous quarter. This was mainly aided by lower selling and administrative costs. In iGATE's case, margins improved for the second consecutive quarter. Operating margin expanded from 15.8% a quarter ago to 17.5%. The company expects to increase this to over 20% by the end of FY09 by bringing down the average employee experience from 3-4 years to 1-3 years.

Analysts are concerned over the signs of a slowdown in the US economy. It's widely believed that any such economic issue may eventually increase outsourcing by US companies to keep costs under control. But the market is more concerned about the quality of the revenue generated in terms of realisations. Even if business is generated, it is important to see the price at which it comes. The results of both iGATE and Infosys throw some light on this aspect of the business.

During the December quarter, both companies were able to win contracts at higher billing rates. These are expected to remain buoyant. Infosys expects billing rates for new customers to go up by 3-4%, whereas repeat business is likely to attract 2-3% higher rates.

Further, both iGATE and Infosys expect to see either flat or marginal uptrend in IT spends in '08. Infosys, for instance, has already seen some of its clients expanding their IT budgets by 6-7%.

Though these results provide a precursor to what lies ahead, the picture will be clearer once results of other IT companies unfold over the next few days.

 

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