IT’s Q2 results — no clear answers yet
The only magic formula to bring the industry back to the centre of stock market discussions is growth
There is an old saying that goes, “When all is said and done, more would have been said than done.” The second quarter results of IT firms in India provided very few positive surprises and the narrative was on expected lines. If there is a strong move in any firm to focus on digital transformation and products, portals and platforms that will redefine the way solutions are designed and delivered by the industry, it’s arguably still a work in progress and while every company states its intention, one is still waiting to see the firms who will break away and rediscover the high double-digit growth formula that was the norm in the past.
The quarterly results of former industry bellwether Infosys have attracted the most discussion, particularly the commentary on strategy refresh. The quarterly performance would have pleased all the well-wishers and shareholders of this company though the lowering of growth guidance raises all the old questions of the ability to chant the digital mantra. There are good signs, including robust acquisition, stability of management and a return to the fundamentals of a strong Bengaluru-based company, though the cynics would argue that the old formula may not yield results and the foray into new areas will have to be strengthened even as customer satisfaction is maximised.
There has been a lot of debate about the reconfirmation of the chairman that there was nothing amiss in any of the actions related to the Panaya acquisition and while that story may still not have been entirely played out, a return to business focus and growth is clearly what the company needs and will be welcomed by all stakeholders. There is one aspect that all CEOs are aware of and industry watchers will need to recognise — the future growth of the company and indeed every ambitious company in the industry will definitely call for significant acquisitions and the valuations of tomorrow will not be on simple EBITDA multiples as in the past. Management will have to pay revenue multiples and be prepared to bet on exciting new technologies which may be yet unproven and some acquisitions may come unstuck but cannot become a stick to beat up management. Four weeks that I spent in the US in the last two months meeting medium and large companies headquartered in that country underlined the fact that growth is going to come by ambitious forays into the digital transformation space. Even smaller companies are looking at digital marketing agencies, digital platform engineering solutions and domain expertise as key differentiators and competency building imperatives for the future, and with the creeping problems created by visa clampdowns and the tightening of immigration in that country and various parts of Europe, a full-fledged business model revisit is clearly the need of the day.
Veteran industry analyst Ankur Rudra, in his incisive analysis of various companies and their results of the last quarter, has pointed out various positives in the Infosys narrative — signs of stability and improved client mining with large deal wins and positive pricing commentary, utilisation improving to all-time high levels and more offshore shift leading to strong margin performance. In comparison, he probes HCL Technologies’ strong IP deal focus which has enabled them to provide much stronger growth guidance for the year in spite of a sharp miss in quarter revenues and wonders if this points to a focus on lower quality business! These are questions that will continue to come up as established services companies attempt to pivot from traditional services models towards product, platform and IP solutions. Many of the traditional measures of robust performance — percentage of work done offshore, people growth numbers and OEM partnerships — will have to be viewed through a new lens and it will no longer be a standard formula but truly different strategies that the top 10 or 12 companies will adopt, where the real need will be to understand the motive for a differentiated strategy and the commitment of management to see it through with robust execution.
So, what is the magic formula to bring IT back to the centre of stock market discussions and get the pundits to stop making disparaging statements about an industry that is past its prime? Clearly the only answer is growth! While the optimists in their opinion on the Infosys guidance suggest that the substantial lowering of growth guidance is simply a return to the old days of “under-promise and over-deliver”, there is no getting away from the reality that these are difficult times for the industry and business as usual is not going to happen unless bold measures are taken to get the growth engines charged up again. Every digital opportunity will have to examined and a majority of the investments need to be directed in these areas, even as delivery efficiency continues to be a focus and value migration to other nimbler competitors is avoided at any cost. The task is still cut out for the Indian pack and the next two or three quarters will be carefully watched! While overseas companies with revenues of a few hundred million like Globant to large-scale success stories like Accenture have clearly won the first few rounds in this match for digital supremacy, our industry has produced winners in every wave and every inflection point and there is no reason to believe that we can’t do it again!