The IT sector has performed well in the past 12 months on the back of currency tailwinds and demand acceleration.
Growth of IT services companies during fiscal 2020 will be broadly in line or marginally lower than fiscal 2019, Kotak Research report said.
Within this, certain companies will report higher growth and certain lower in fiscal 2020 as against fiscal 2019.
The December 2018 quarter was strong thanks to a solid IT spending environment and was powered by execution of deal wins of the earlier quarters. TCVs and deal pipeline are strong. Increased onsite cost structure was visible though cost rationalization helped many companies mitigate it.
Revenue growth was strong across companies. Tier-1 IT reported revenue growth in the range of 1.8-5.6 percent on sequential basis and 7-13 percent year on year on constant currency basis.
Large deals won through the course of the year helped the growth. Companies reported record TCV wins with growth in excess of 14 percent in many cases. This provides visibility and lays the foundation of near-term growth.
Performance on margins was a mixed bag with decline reported by TCS and Infosys and increase by Wipro and Tech Mahindra. The pressure point on profitability is resulting largely from shortage of talent in the US combined with challenges on procurement of fresh visas and even renewals of existing ones.
Companies will have to use creative strategies to offset some of the headwinds, like pushing through pricing increases, use of near-shore geographies and leverage of talent in Mexico and Canada that does not fall under the H-1B ambit to fulfill demand.
A slowdown in the US, uncertainty around Brexit and trade wars could impact IT services business. Clients are budgeting for a year of slowdown. Cost take-outs have become a key priority again and tailwind from increasing digital deal sizes and accelerated deal momentum courtesy clarity on simplification of the core.
Companies continue to hire as they anticipate an improved demand environment. Net hiring for six large companies, viz. TCS, Infosys, Wipro, HCL Technologies, Tech Mahindra and Cognizant stood at 30,821 in December 2018 quarter as compared to 5,880 in the same period last year. Net addition in 9MFY19 was strong at 98,033 compared to net addition of 602 in 9MFY18.
Attrition rates have increased by 0-400 bps. High levels of attrition are a result of tight labor conditions in the US and high demand for skills in new technologies.
Margins faced pressure for most companies as shortage of talent supply onsite resulted in increased subcontracting costs and investments to address attrition. Margin improvement in Wipro and Tech Mahindra was due to SG&A leverage and cost rationalization.
