IT cos' mfg vertical bucks gloomy global scenario

IT cos' mfg vertical bucks gloomy global scenario

Informist, Friday, Nov 24, 2023

By Reshab Shaw and Vivek Kumar

BENGALURU/MUMBAI - The manufacturing vertical has turned out to be a saving grace for India's top five information technology companies so far in the current financial year, as the export-driven IT sector witnesses headwinds of a global slowdown. Though a tad slower than the June quarter, manufacturing has shown resilience to report one of the highest year-on-year revenue growth rates among verticals, even as the overall toplines have shrunk 0.4% on an average in the September quarter.

In Apr-Jun, the manufacturing vertical was the only segment to have grown for all the top-tier Indian IT companies: Tata Consultancy Services, Infosys, HCLTech, Wipro and Tech Mahindra. For most of these companies, the financial services and retail verticals--the top revenue contributors--have seen sluggishness in the past couple of quarters.

On an average, revenues of the manufacturing vertical grew nearly 5% for these five companies in Jul-Sep. On a quarter-on-quarter basis, the growth was marginal, even as the overall revenue of these companies declined on a constant currency basis.

Their revenue from the financial services vertical declined over 2% year-on-year, and the retail segment grew 1.4% in Jul-Sep. The weakness in the financial services vertical, which contributes around 26.5% to the top five IT companies' revenue, was also seen in Apr-Jun. In the same quarter, the manufacturing vertical had seen an average year-on-year growth of a whopping 13%.

The manufacturing vertical typically contributes about 14-19% of revenue for Infosys, HCLTech, and Tech Mahindra, and 7-9% for TCS and Wipro. Bulk of this revenue comes from the European and US markets, analysts said.

Pareekh Jain, chief executive officer and lead analyst at Pareekh Consulting, said automotive firms are seeing a large transformation and increased spending on electric vehicles, autonomous, and connected vehicles. These clients are looking for outsourcing partners to optimise on costs and to access digital talent.

For Bengaluru-based Wipro, the only IT company to have reported a year-on-year decline in revenue from the manufacturing vertical during Jul-Sep, the weakness appears temporary. The company said it had seen a slowdown in one or two projects in the vertical over the period, which would likely see a reversal.

Wipro's weak performance in the manufacturing segment was not structural and it "will bounce back", as the company has seen good traction in the engineering subsection, Thierry Delaporte, chief executive officer and managing director of the company, had said in a post-earnings press conference last month.

Piyush Pandey, lead analyst at YES Securities, said the manufacturing vertical has been performing well across IT companies, mainly led by digitalisation of manufacturing processes.

Wipro's Delaporte had said the engineering services sector has been a significant driver of growth within the manufacturing vertical. 

This is also reflected in the strong growth of companies that are purely focused on engineering, research and development. The average revenue of engineering, research and development majors--L&T Technology Services Ltd, Tata Elxsi Ltd and KPIT Technologies Ltd--grew 21% year-on-year in Jul-Sep in constant currency terms. Comparatively, the top five IT companies saw a 0.4% decline in revenue during the quarter.

The growth differential is also reflected in the stock performance of these companies. While the shares of the three engineering, research and development companies have risen 55% on an average so far in 2023, those of the top 5 IT companies are up 9.4%.

While the overall outlook for the IT sector remains hazy, experts believe their revenues from the manufacturing segment may continue to do well. 

Aerospace companies have large order backlogs, and they need partners who can provide talent and help manage their faster product development, production, and supply chain, Pareekh Consulting's Jain said. "The three drivers--engineering, automotive, and aerospace--are for the near to medium term, so growth looks sustainable," Jain said.

For TCS, analysts said the growth in the manufacturing vertical may continue, given that it bagged a large deal from another Tata group company Jaguar Land Rover in September.

"TCS has invested meaningfully in the digital twin and overall digital services capabilities for this (manufacturing) sector, that is helping it engage clients," said Yugal Joshi, partner at US-based consulting firm Everest Group. A digital twin is a virtual representation of a physical object or system that mimics its behaviour and characteristics, providing real-time data and insights for analysis and simulation.

Though the prospects for the manufacturing vertical look robust, uncertainties abound. According to some analysts, in light of persistently high interest rates and concerns over a slowdown, there are less consistent patterns as far as the performance of verticals is concerned. "A vertical... or region... that does well in two quarters, does poorly in next two quarters. Planning for such a type of environment is extremely challenging," Joshi said.

The following table shows the top five IT companies' revenue growth (in percentage terms) from the manufacturing vertical in the two quarters of this financial year:

Company Jul-Sep Apr-Jun
TCS 5.8 9.4
Infosys 12.6 20.7
HCLTech 3.3 16.5
Wipro -3.6 8.7
Tech Mahindra 5.7 8.6

The following table shows the manufacturing vertical's contribution to top IT companies' total revenue (in percentage terms) in the two quarters of this financial year:

Company Jul-Sep Apr-Jun
TCS 8.5 8.3
Infosys 14.3 14.1
HCLTech 19.3 19.9
Wipro 7 7.3
Tech Mahindra 17.8 16.9


Edited by Ranjana Chauhan

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