Higher Revenues But Also Higher Costs For Indian IT Players

Gartner estimated recently that worldwide IT services revenues declined 5.3% over the year in 2009 to $763 billion. Revenues for all players in the industry declined, with HP and Accenture reporting the biggest drops of 10.4% and 11.8% respectively. But India-based service providers saw revenues increase 3.6% for 2009 in dollar terms. However, growth was lower than the 15.4% rate reported a year ago. Cognizant Technologies (NASDAQ:CTSH) managed to increase its market share in the period from 0.3% in 2008 to 0.4% in 2009. The company’s performance remained strong in the most recent reported quarter as well.

Q1 revenues grew 29% over the year to $959.7 million and exceeded the market’s expected $939.1 million. EPS of $0.53 was higher than the previous year’s $0.41 and the market’s expected $0.48. This was the fifth consecutive quarter in which Cognizant exceeded profit expectations.

During the quarter, Cognizant added 52 clients and increased its headcount by 7,100 employees. Turnover remained high. Annualized attrition, including both voluntary and involuntary, increased sequentially by 420 basis points to 16.4%. The company believes that higher attrition was driven by a rapid return to hiring by competitors and the revival of the economy. Offshore utilization, excluding trainees, was approximately 76%, and on-site utilization was 89% during the quarter

Cognizant recently announced the acquisition a London-based program management consulting firm, The PIPC Group. PIPC provides program management services and tools, including project management and post-merger and acquisition integration services. Cognizant already has over 1,800 consultants as part of its Cognizant Business Consulting (CBC) division, which helps focuses on providing these services. The company is looking to “extend and complement” its project management and consulting business and expand its footprint in the UK, Australia, and New Zealand through this acquisition. It will also be able to address the cyclical demands arising out of mergers and acquisitions through this enhanced team.

Cognizant projects Q2 revenues at $1.015 billion with EPS of $0.55. For the year, it expects revenues of $4.1 billion with EPS of $2.26.

The stock is trading at $49.43 with a market capitalization of $14.8 billion. It touched a 52-week high of $54.35 two weeks ago.

Wipro (NYSE:WIT) also saw revenues grow in the quarter. IT Services revenues of $1,166 million increased 3.5% sequentially and 11.5% over the year. In constant currency terms, revenues grew 4.7% over the quarter and 8% over the year. For the year, IT Services reported revenues of $4.50 billion, recording growth of 6% over the year.

To expand its cloud-based offerings, Wipro recently tied up with NetSuite. The two players will work toward setting a new standard for cloud solutions expertise for organizations worldwide to rely on. Initially, the partnership will focus on the Asia-Pacific market with expansion planned for North America.

Wipro also extended its relationship with Pegasystems, a leader in business process management (BPM) software solutions, to focus on developing innovative solutions worldwide across a range of industry verticals.

Wipro’s attrition levels are also relatively high. For the quarter, the company reported 17% attrition. It expects attrition levels to remain high for the next couple of quarters. This was despite the 8%–10% increase in offshore and 2% increase in onsite salaries.

Wipro expanded its delivery presence with opening of a center in Curitiba, Brazil, and a development center in Melbourne, Australia. While these two locations are useful investments to front-end and move up the value chain with customers, it should also explore expansion in the rural regions as a cost effective alternative.

The company projects revenues of $1.19 billion–$1.215 billion for the current quarter. The stock is trading at $21.19, taking its market capitalization to $31.1 billion. It reached 52-week high of $24.74 last month.

Genpact (NYSE:G) saw Q1 revenues increase 8.4% to $288.2 million, but its numbers missed the Street’s targeted $290 million. EPS of $0.13 fell by a penny from the previous year and also missed the market’s projected earnings of $0.15. Despite the weak start, Genpact maintained its projection for the year at revenues of $1.28 billion­–$1.31 billion with operating margins of 17%–18%.

Genpact also tied up with NetSuite to transform and modernize its BPM offerings with cloud-based solutions that it says will enable companies to quickly realize the benefits by “abandoning archaic and expensive software infrastructure in favor of efficient, cost-effective, and nimble enterprise management.” Genpact aims to use its industry and process domain expertise along with its global operating model to help customers gain control over, flexibility in, and visibility of their IT costs.

The stock is trading at $16.24 with a market capitalization of $3.55 billion. It touched a 52-week high of $18.30 last month.

While the IT spending forecasts for the coming year are positive, Indian IT players are slowly losing the benefit of labor arbitrage, given the salary increases they are implementing to stay competitive. Earlier this month, Infosys, TCS, and HCL announced their plans to give annual increments and discussed the expected impact on margins. Cognizant, Wipro, and Genpact aren’t immune to these pressures, either. They witnessed high attrition levels during the quarter and expect numbers to stay at these levels in the coming quarters. As I said earlier, it is time these players expand their operations to the still-untapped rural and small-town population of India. Not only will that diversification help them control costs, but it could also keep a tighter rein on attrition.