TCS, Infosys, Wipro and others to decelerate this FY

US-based research DeepDive and Everest Group have forecast that organic constant currency revenue growth for the top five Indian IT firms – TCS, Cognizant, Infosys, Wipro and HCL Technologies – will drop to 6.9% in the ongoing fiscal, from 7.9% in the preceding year ended March.
The collective growth of the five has dropped for the last seven quarters, from 13.2% in the June 2015 quarter to 6.9% in the March 2017 quarter, underscoring the pressures the firms are facing.
Rod Bourgeois, head of research at DeepDive Equity Research, said he maintains a cautious outlook on secular growth challenges, though he sees signs of cyclical demand improvement. The $155-billion Indian IT industry is in the midst of structural changes as their customers are migrating to a cloud environment, a game changer for businesses of all sizes that reins in capex spending and collapses time-to-market by a huge measure.
Automation and devops, an offshoot agile software development encompassing iterative and collaborative work, are also accelerating this trend.
“So the good news (in the near term) for Indian services stocks is that C1Q (Jan-March) caused Street expectations to taper, and the Indian firms’ guidance outlooks are now more realistic, as they now embed a heavier recognition of the secular challenges we’ve emphasised over the past couple of years while at the same time Indian firms may receive some upcoming help from improved cyclical demand trends,” Bourgeois said.
The top-5 Indian firms have experienced steady margin degradation over the past two years. The average annual operating margin of the firms dropped from 24.0% in FY15 to 23.0% in FY16 to 22.3% in FY17 (ending March).
On a positive note, Bourgeois said its industry checks across major IT services players reveals general optimism about upcoming cyclical improvement in demand in the BFSI (banking, financial services, and insurance), energy, and healthcare verticals. It expects some improved IT services spending will transpire. IT firms are making rapid strides in building digital capabilities. TCS, for instance, said digital revenue contributed $3 billion to the company’s annual revenue in the 2016-17 financial year.
“To stem the tide of longer-run growth deceleration, we emphasize that large Indian firms need to make more progress in building digital consulting capabilities and better vertical-specific expertise,” Bourgeois said.
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