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Business trends

Indian IT posts record profits on digital transformation wave

TCS, Infosys and others roar back to life in latest quarter amid pandemic

The combined net profit in the October-December quarter of four leading Indian IT companies reached $2.7 billion for the first time. (Nikkei montage/Source photos by AP, Getty Images)

MUMBAI -- India's top information technology companies, including Tata Consultancy Services, Infosys, HCL Technologies and Wipro surprised market watchers by reporting record results during the quarter ended December, as their global clients accelerated their digital transformation efforts amid the COVID-19 pandemic.

The IT companies all reported record quarterly net profits in an otherwise seasonally weak period. The combined net profit of the four companies surpassed 200 billion rupees ($2.7 billion) for the first time.

Traditionally, the main customers of Indian IT companies have been multinational corporations such as big U.S. and European financial institutions. The fact that the Indian IT industry is performing well indicates that those customers are increasing their IT spending.

"The technology sector is in the midst of a massive digitization wave, with more global enterprises embracing digital transformation to address the disruption of these unprecedented times," HCL Chairman and Chief Strategy Officer Shiv Nadar said in a statement. His company posted a net profit of 39.7 billion rupees, up 34.8%, year-on-year, for the quarter.

"Technology has been a key enabler during the pandemic, and as we stand at the cusp of the next phase of technological innovation, it is vital that we draw inspiration from each other's strengths and offer back our own to create a positive impact," he added.

Market leader TCS posted a 7.2% year-on-year rise in net profit to 87 billion rupees on revenue of 420.2 billion rupees. The company will pay a dividend of 6 rupees per share for the quarter, an increase of 1 rupee from the same period the previous year.

"We are entering the new year on an optimistic note, [with] our market position stronger than ever before, and our confidence reinforced by the continued strength in our order book and deal pipeline," said TCS Chief Executive and Managing Director Rajesh Gopinathan.

Infosys reported a net profit of 52 billion rupees, up 16.6% on the year. Its revenue increased 12.3% to 259.3 billion rupees. Wipro posted a 20.8% rise in net profit from a year earlier to 29.7 billion rupees. Its IT services segment revenue grew 3.9% from the previous quarter, the highest in 36 quarters, the company said.

For all four IT companies, operating margins were in double digits -- in the range of 21.7% to 26.6% -- led by revenue growth. The four companies' combined net profit for the quarter rose 15.9% from a year earlier to 208.3 billion rupees.

Infosys staff at the company headquarters in the southern Indian city of Bangalore: The company had nearly 250,000 employees as of the end of December 2020.   © AP

Infosys revised upward its year-on-year revenue growth and operating margin guidance for the financial year ending March to 4.5% to 5% and 24% to 24.5%, respectively, from 2% to 3% and 23% to 24% in their previous estimates, on the back of the strong December quarter performance.

Global corporations have reevaluated their IT strategies, which augurs well for not just Indian IT companies but some of their global peers as well, such as Accenture and Capgemini. Experts expect growing IT demand from Europe, although the U.S. will remain the biggest source of clients for Indian IT companies.

In late December, Infosys and German automaker Daimler, announced a partnership in cloud computing and IT infrastructure transformation. "As a part of this partnership, automotive IT infrastructure experts based out of Germany, wider Europe, the U.S. and the APAC region will transition from Daimler AG to Infosys," the companies said in a joint statement.

During the latest quarter, Infosys signed $7.1 billion of large deals, adding 139 new clients to its kitty. "The scale of new client partnerships with leading global companies such as Vanguard, Daimler and Rolls-Royce demonstrates the depth of digital and cloud capabilities of Infosys," said CEO and MD Salil Parekh.

Meanwhile, TCS agreed to expand its partnership with the Star Alliance, the world's largest airline alliance, in December. "With TCS, we look forward to accelerating the development of new enterprise applications and customer features, and deploying machine learning models, to allow us to introduce new services," Star Alliance CEO Jeffrey Goh said in a statement.

The Star Alliance has expanded its partnership with Tata Consultancy Services to improve customer service through the use of digital technologies, such as artificial intelligence.   © Reuters

Wipro recently reached an agreement with German wholesaler Metro to take over its IT units and 1,300 employees as part of an IT outsourcing deal worth up to $1 billion over nine years.

Indian IT companies view these big deals as a multiyear tailwind, as the transformation they expected in the next three to five years will be complete in as early as two years as enterprises shift their workers online. The transformation began after IT companies witnessed a temporary lull during the peak of COVID-19 lockdowns worldwide last March.

With this favorable business environment, Indian IT companies are retaining their price bargaining power, noted Amit Chandra, vice president of HDFC Securities.

"The [high operating] margins are here to stay," Chandra said. "Though the currency remains a risk, if the pricing tailwind remains, along with operational efficiencies, it will not be impacted much. These kinds of deals benefit the larger [IT] vendors more because they have the balance sheet size and expertise for executing them. Indian IT has become a global competitor."

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