IT is back on track

Software & services boom again.

The improved showing by India’s IT companies in the second quarter, leaving aside Wipro’s underperformance, is reassuring.

Infosys and TCS shone with a robust performance despite the challenges of a volatile currency.

HCL has had a remarkable turnaround as well.

Given that their performance has been continuously improving over the last four quarters, it is clear that the global clients of these companies have mostly restored their IT spending, after slashing it during the crisis.

Thus, TCS reported a 25% year-on-year rise in its revenues and Infosys 24.4%. Wipro lagged with a 15% growth.

Net profit growth trends, year-on-year basis, were, however, mixed — while TCS reported a 32% rise, Infosys and Wipro were relatively muted.

The variation in performance can only be explained by the differences in the composition of the type of work the big three IT firms handle.

For instance, financial services constitute just about 25% of the business handled by Wipro.

In contrast, financial services accounted for 35% of the revenues of Infosys and 45% of TCS.

The rebound in the financial services sector has clearly boosted the performance of TCS.

The geographical spread of business, too, has some impact on revenue growth and profitability, given the variance in the level of economic recovery in different parts of the world.

The share of revenues from the Americas was the least for Wipro, just 56%, as against 65% for Infosys and over 57% for TCS.
    
Currency volatility will remain the chief concern for these IT companies.

While the movement cannot be predicted over a long term, these companies will have to manage with short-term hedging.

Attrition, too, can return as a major challenge, putting pressure on companies to improve compensation.

That would have an impact on margins, as Wipro experienced during this quarter.

Protectionist noises in the US are unlikely to have much impact.

In addition, huge opportunities are opening up in the domestic market, providing an automatic hedge against rupee volatility and any reversal of global recovery.

India is gearing up to deploy its information technology capability in improving governance and expediting services such as banking. And that is good news.