TCS, Infosys set a positive tone for 2019

Indian IT bellwethers Tata Consultancy Services (TCS) and Infosys are clearly riding the digital wave, as almost one-third of their revenue comes from their digital business.

For the quarter ended December 31, of fiscal 2019, both TCS and Infosys posted a double-digit revenue growth year-on-year, which was propelled by the growth in their digital business which was above 30%. In all, their revenue growth signalled a steady demand for IT service exports, particularly from the key markets of U.S. and Europe.

Over the last few years software-services companies in the country have ramped up their digital service offerings such as artificial intelligence (AI), analytics, mobility, the Internet of Things (IoT), automation and cloud computing, as clients push for more transformative services than just cost-savings outsourcing deals.

For the third quarter ended December 2018, TCS’s revenue from its digital technology offerings grew 52.7% year-on-year, contributing 30.1%, or $1.58 billion, of total revenue during the quarter under review. Infosys’s revenue from digital business rose 33.1% year-on-year and accounted for $942 million, or 31.5%, of total revenue in the December quarter, one of the highest among the top-tier Indian IT firms.

“With increased client relevance, we saw double digit (10.1%) year-on-year growth in Q3 on a constant currency basis,” said Salil Parekh, CEO and MD, Infosys. “We also had another strong quarter in our digital business with 33.1% growth and large deals at $1.57 billion which gives us confidence entering 2019,” he added.

A Motilal Oswal report on TCS dated January 10, pointed out that newer technologies such as AI, IoT and blockchain have started to gain traction. “All of these saw healthy deal wins during the quarter. TCS continues to invest in employees by training 2,92,000 employees in digital and 3,18,000 employees in agile technologies,” the report noted.

On Friday, Infosys posted a revenue of $2.98 billion during the December quarter of FY19. Quarter-on-quarter revenue was up 2.7% on a constant currency basis. During the same period TCS recorded a 12.1% y-o-y rise in dollar revenue growth at $5.25 billion, while quarter-on-quarter it was up 1.8% in constant currency.

Software-services companies uses the constant currency method to eliminate the effects of exchange rate fluctuations while calculating financial results.

Over the years, TCS has managed to widen its gap with Infosys and Wipro in terms of revenue growth and profitability. In dollar terms, TCS recorded net profit of $1.14 billion in the December quarter and Infosys posted profit of $675 million.

While in terms of revenue growth and profitability, Bengaluru-based Infosys pales in comparison to larger rival TCS, growth in terms of digital revenue seems to be at a similar pace. But TCS and Infosys are not alone in the digital race.

For the quarter ended September, 2018, Tech Mahindra’s digital revenue contribution was recorded at 31% of total revenue in the September quarter. Tech Mahindra is yet to announce its December quarter earnings.

Indian IT firms typically define revenue from digital in areas such as cloud computing, IoT, analytics, mobile and social. This also include specialised content creation for digital platforms, design and in areas of e-commerce. According to reports revenue from digital business is growing at 20-30% year-on-year for the Indian IT players.

And this was evident last year as companies ramped up their digital capabilities through niche acquisitions. In December Wipro took over the team at Syfte, an Australian design agency to strengthen its digital business and expand its reach in Australia and the Asia Pacific region At the same time, Cognizant acquired New York-based Mustache, a privately-held creative content agency to boost its digital content offerings, video content and programming.

Last year, TCS acquired London-based W12 Studios, a design firm. It was TCS’s one of the first acquisitions in the digital space. In April 2018, Infosys acquired U.S.-based WongDoody, a digital creative and consumer insights agency for $75 million.

In an export-heavy and highly commoditised industry where players clone each other’s offerings, software-services companies are looking to create a differentiating model backed by newer technologies and services. Analysts say that the key is to become a “relevant” player in the industry. And that requires a combination of consulting, digital and the traditional IT services backed by innovative offerings.

“Growth for the Indian IT [sector] has been gradually picking up from current 6-7% as digital services proliferate, which today are still small to move the needle on overall performance,” said the Motilal Oswal report. According to Nasscom, India’s software services exports is expected to see revenue growth of 7-9% in FY19.

TCS and Infosys’s performance in the October-December period was backed by strong revenue growth across geographies and other key verticals such as banking, financial services and insurance (BFSI), one of the major verticals for Indian IT firms contributing 30-45% of revenue.

India’s second largest IT firm Infosys raised its full-year revenue growth guidance to 8.5-9% in constant currency terms from its earlier prediction of 6-8% on the back of sustained demand for its core IT services and digital technology solutions from its clients in the West.

“Volume growth was strong and revenue productivity was stable despite Q3 being a seasonally weak quarter. We had good growth across geographies and large business segments,” said Pravin Rao, COO, Infosys while announcing the results on Friday.

Traditionally for the information technology (IT) industry, the October-December period, is considered the weakest quarter in a financial year due to the holiday season in the U.S. and Europe, the largest markets for Indian IT companies. Software exports to the U.S. contributes over 60% of the revenue of the $167-billion Indian IT outsourcing industry.

During the October-December quarter Infosys’s net profit declined 29.6% year-on-year to ₹3,610 crore from ₹5,129 crore in the same period last year. Infosys had earlier planned to sell the the automation firm Panaya and Skava, the mobile e-commerce firm. During the December quarter the management decided to abandon its plan of selling both the companies.

Despite an otherwise quiet and seasonally weak December quarter, Infosys won deals worth more than $1.5 billion.

Infosys on Friday said that its board has approved a share buyback for up to ₹800 a share, which will cost the IT major about ₹8,260 crore. In December 2017 Infosys completed its first share buyback returning ₹13,000 crore.

Shares of Infosys closed at ₹683.70 a piece, marginally up 0.58% on the Bombay Stock Exchange on Friday, while shares of TCS closed at ₹1841.95 a share down by 2.45%. The Sensex, ended Friday marginally down by 0.27%.