IT cos mfg vertical sales up on strong demand

Informist, Thursday, Jul 27, 2023

By Reshab Shaw

BENGALURU - Amid weak demand and lacklustre earnings in the June quarter, information technology companies are witnessing an increase in deals from the manufacturing segment. This is primarily due to robust demand in sub-verticals like automobiles and aeronautical, coupled with a gradual normalisation of worldwide supply chains, according to analysts.

Tata Consultancy Services Ltd's revenue from the manufacturing segment grew 1.5% sequentially to 5.64 bln rupees in Apr-Jun on a total revenue growth of 0.4% on quarter to 593.81 bln rupees. Nearest rival, Infosys Ltd, clocked a sequential growth of 5.4% in the segment at 53.5 bln rupees on an overall sales growth of 1.3% at 379.33 bln rupees.

While both these companies have been facing headwinds from the banking sector, other verticals are a mixed bag.

"Manufacturing is so far resilient because of two factors. All said and done, macroeconomic and GDP data are still resilient and are in positive territory," said Dipesh Mehta, a senior research analyst at Emkay Global Financial Services.

Revised Jan-Mar GDP of the US came in at 2.0%, Canada grew 3.1%, and Europe grew 0.1% in the same period. The US, Canada, and Eurozone are among the largest markets for Indian IT companies.

Mehta also highlighted strong sales of automobiles and surging air traffic that have stimulated demand within these sectors and contributed to the growth in the manufacturing segment.

Mehta emphasises that the sustainability of this growth in the manufacturing vertical depends on the overall macroeconomic outcomes in the future.

Analysts expect the manufacturing vertical of IT companies to continue growing in the medium term due to trends like digitisation, cloud migration, Internet of Things, and cybersecurity.

"Manufacturing, on average, has done well for almost everyone...so all those trends (listed above) are helping spends in the manufacturing vertical to still remain strong," said Sumeet Jain, IT analyst from ICICI Securities.

The third largest player in the space HCL Technologies also saw its manufacturing segment growing 3.6% sequentially in Apr-Jun on a total revenue decline of 1.3% during the quarter. Similarly, Bengaluru-based Wipro Ltd posted a 0.9% growth in the manufacturing vertical, with the total revenue contracting 1.6% sequentially during the quarter.

Pune-based Tech Mahindra Ltd, which reported its results on Wednesday, saw its manufacturing verticle growing 1.8% sequentially in Apr-Jun, despite a 4.1% decline in total revenue for the quarter. The company attributed the growth to the increasing creation of embedded software, particularly in the automotive and aeronautical sub-sectors, which are experiencing high demand.

"Skills that are required are becoming more software-oriented so with that there's (a) lot of transformation happening, and we see the demand shift more in that nature," said Rohit Anand, the chief financial officer of Tech Mahindra, addressing analysts after declaring Apr-Jun quarterly results.

Furthermore, the global push for electric vehicles has resulted in increased investments in this industry, leading to higher demand for platforms and engineering support. Although the spending in this sector is discretionary in nature, it has not seen significant cuts compared with other verticals.

Looking ahead, companies and experts remain optimistic about the manufacturing segment, even as demand from other key verticals faces pressure due to recessionary fears and delayed decision-making.

"Manufacturing and transport (automobiles and aeronautical) segments are expected to drive growth in Q2FY24 (Jul-Sep)," said Piyush Pandey, a lead analyst at YES Securities, in a research note.

The manufacturing vertical may be very small in the overall scheme of things for IT companies for now, but it is picking up pace.

Today, shares of TCS closed 0.3% higher at 3,396.90 rupees on the National Stock Exchange, while Infosys closed 0.3% higher at 1,353.15 rupees, HCL Technologies closed 0.2% higher at 1,117.35 rupees, Wipro ended 0.7% lower at 399.95 rupees and Tech Mahindra closed 3.8% lower at 1,099.90 rupees. End

Edited by Akul Nishant Akhoury

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

Informist Media Tel +91 (22) 6985-4000

Send comments to feedback@informistmedia.com