>INFORMATION TECHNOLOGY SECTOR: Rest of the World (RoW) performance was subdued during the quarter

■ Decent result in a seasonally weak quarter
Despite operating in an uncertain macroeconomic condition and the December quarter being a seasonally weak quarter (due to lower number of working days); large cap IT companies delivered reasonable revenue growth in constant currency (CC) terms in a range 3.7% - 4.5% QoQ. However, adverse cross currency movement has dented the Dollar revenue growth which was in the range of 2% - 4.6% QoQ.


In December quarter on an average the rupee has depreciated around 11% against the US dollar which has aided large cap IT companies to report rupee revenue run rate in the range of 11.4% – 15.4% QoQ.



■ Mid cap a mixed bag
During the quarter Midcap IT companies delivered a mixed bag of performance. Companies such as Hexaware, Eclerx, KPIT Cummins and NIIT Technologies delivered over 3.5% sequential revenue growth in dollar terms and Persistent, Polaris, Mastek, Mindtree and Geometric delivered sub 3% revenue growth. 



■ Pricing to remain Stable
Pricing by and large continues to remain stable. Among Tier-I companies, Infosys pricing increased by 0.8% in constant currency terms. Although HCL Tech pricing has gone down in reported currency, in terms of constant current it has seen a slight increase. For Wipro and TCS; though the like-to-like pricing remained stable, revenue productivity during the quarter was up due to effort and service mix. Among the mid cap IT companies, Eclerx and Mind Tree saw a price hike in the range of 2.5 – 3.5% YoY and the price increase of the latter was partially due to one time transition revenue. For KPIT Cummins on a like-to-like basis newer contracts got minor pricing uptick while for Geometric and Hexaware pricing was largely stable. Going forward IT companies expect pricing to remain stable unless the business proposition changes.


■ Margin expanded due to favorable currency
Margins expanded well during the quarter, for all IT companies under our coverage, largely aided by rupee depreciation. In the large cap space Infosys topped the list in margin expansion (EBIDTA) with 300 bps, while in the mid cap segment Persistent, Polaris and Eclerx margins expanded over 6% sequentially.


Companies such as Cognizant, Wipro and Geometric witnessed margin expansion less than a percentage. Mastek reported a swing of 11.1% in its EBIDTA margins, which was mainly on account of change in Forex accounting treatment (adopted AS-30) where the MTM on any forward contract is reflected directly in the reserves under the Balance sheet, leaving no trace on P&L. Going forward, rupee appreciation is likely to act as a headwind; however, increasing offshore effort and moderate wage hikes are likely to curtail margin downside.



■ Growth by Vertical
During the quarter, BFSI segment continued to grow at a reasonable pace with Wipro and Infosys in the large cap and Mastek; Geometric and NIIT Technologies in the mid cap grew over 3% sequentially in dollar terms.


In the Manufacturing vertical, Tier I companies posted a positive growth for the sixth consecutive quarters. Infosys and HCL Technologies posted a sequential growth of 4.5% and 3.8% well above their respective overall revenue growth. In the Retail & Transportation segment, HCL Tech has outpaced its peers by registering a sequential growth of 5.6%, TCS and Wipro grew 3.7% and 3.6% respectively. After the stupendous run in last few quarters, Energy & Utilities segment of Tier I companies took a pause, however Infosys has bucked the trend and reported 8.9% sequential growth. Life science segment was under lime light during the quarter with HCL Technologies reporting a sequential growth of 15.4% and Infosys grew by 9%.



■ Growth by Geography
By and large revenue from North America increased for most of the IT companies, barring a few like Sasken, Mindtree and Polaris which de-grew by 6.14%, 1.54% and 0.22% respectively. Eclerx in the Tier II and HCL Tech in the Tier I continue to top their respective pack by growing 12.57% and 7.48% QoQ respectively.


Infosys revenue from Europe grew 14% QoQ after posting a subdued performance for last two quarters. Mindtree’s European revenue grew 11.9% QoQ, posting a double digit sequential growth for 5 consecutive quarters and tops the Tier II pack. We expect Europe to grow faster compared to US, because of the low penetration of offshoring in Europe compared to US. Moreover the current economic distress in Europe will force the European companies to become cost efficient thus leading to more offshoring. 


By and large Rest of the World (RoW) performance was subdued during the quarter; revenue from RoW for HCL Technologies degrew by 16.07% QoQ and amongst Tier II vendors Eclerx, Sasken and Mastek revenue degrew by 30%, 23.7% and 10.6% respectively.


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