Technology Stocks – Indian IT industry has been fleet-footed and quick to adapt

In the last one week, the four major IT companies in India have announced Q3 results. The surprising part is that there has been a consistently flattering show by IT companies across the board. Why has IT suddenly come into the limelight?

Attractive guidance for IT

Among the top 4 IT companies in India, TCS still does not give guidance about the future performance. That has been their stand from day-1. However, if we look at the other 3 players, guidance on revenues has been quite robust. Wipro, Infosys and HCL Tech have all guided a revenue growth of 2.5% to 3.5% on an average in the Mar-21 quarter. That is a sign of solid traction in IT spending in the key markets of the US, UK and EU. The concerns expressed by Gartner on IT spending appear to be exaggerated.

Operating Margins got a boost

If there is one factor that stands out across all four companies, it is the sharp improvement in operating margins. Of course, TCS leads with over 26% while Infosys is close behind at above 25%. But what is really gratifying is that even HCL Tech and Wipro saw a 300 basis points expansion in OPMs and both are comfortably above 21%. This is the first time in recent quarters that the OPM expansion has been so robust across the four large IT companies. COVID surely forced Indian IT companies to manage costs better and cut down on attrition.

Digital and off-shoring

There have been two distinct shifts that were forced upon Indian companies in the last 8-10 years. First was the big shift towards digital. From traditional BFSI, the focus of IT projects shifted to cloud, analytics, mobility and social. The Indian IT industry did manage to adapt quickly and today more than 35%-40% of revenues of all the top IT companies come from digital businesses. Secondly, the restrictions on H1-B initiated by Donald Trump in 2016 took its toll on the on-shoring model. Indian IT was again quick to adapt to a mix of off-shoring of projects and getting projects executed with local manpower. Today, the IT companies are reaping benefits.

IT has been ahead of the curve

The one thing most of us tend to miss out is that like the idea propounded in Darwin’s theory of evolution, the IT companies have the most adaptable. Be it the end of tax concessions or the post-Y2K regime, or reducing focus on BFSI or shifting to digital and off-shoring; the IT companies have been able to adapt much better than most other industries in India. That ability to adapt was most visible in the midst of the pandemic in 2020. Be it adapting to the distributed operational model or the work-from-home model or to tighter IT budgets, this sector has done it best. The latest Q3 results of the  sector are a reflection of this adaptability! ©