On paper, what happened in the last quarter of FY2015 was unsettling, to say the least. Industry growth was flat lined over last quarter (Q3FY15), profitability recorded a marginal decline despite an appreciating dollar, and forward looking commentary from leading companies also gave mixed signals. Look closer though, and some interesting facts emerge.
- Industry grew in constant currency terms: Analysis of public company results show that they might have grown by only 0.3% QoQ in reported currency terms, but in constant currency terms, the growth is a healthy 1.2%. For comparison, QoQ growth rate achieved a year back (Q4FY2014) was 1.9%. Q4FY15 experienced immense levels of cross currency volatility. The US dollar appreciated versus the Euro, GBP and other currencies. The Euro, GBP and INR has depreciated by 27%, 13% and 4% respectively. Currency has shaved off an average of 1-2% reported top line growth in Q4FY15. Companies with more exposure to non US markets have been hit harder. The impact on Accenture, for example, is expected to be 3-4%. Know more about cross currency impact in my detailed blog (http://blogs.nasscom.in/cross-currency-impact-on-indian-it-bpm-industry-a-fact-check/).
- The volatility in the market and impact on technology is a global issue and not restricted to Indian tech companies- This was a poor quarter in terms of outsourcing deal volumes. Global ACV (annual contract value) was down 18% YoY. Though ACV in Americas was up by 10%, EMEA was down by 26%, and Asia-Pacific by 45% YoY. The impact is on the global technology industry- according to Gartner’s latest forecast, worldwide IT spending is set to shrink to $3.7 trillion in 2015, a 1.3% decrease from 2014, as compared to a 2.4% growth forecasted in their December 2014 update. However, this is not a crash, even if it looks like one. Taking out the impact of exchange rate movements, the corresponding constant-currency growth figure is a healthy 3.1%
- Healthy bottom lines, creating opportunity for investment: The profits of the listed technology and BPM companies have grown 7% YoY and -0.3% QoQ. In comparison, the aggregate net profit of top 100 India listed companies (across sectors) for Q4FY2015 have fallen by 9.2% YoY. The tech sector still continues to outperform other industries.
- Industry continues to be a net hirer, investing in learning and development: The industry headcount growth was a healthy 2.3% QoQ and 11.3% YoY. Focus on training, learning and development and emphasis on building digital capabilities and skills are the key priority for the industry.
- Utilities and Europe were key sectors / markets that drove the decline in demand. Revenues from utilities and Europe declined by over 4% QoQ. As per data, reported growth in Q4FY2015 minus utilities is 0.6%; growth minus Europe is 1.6%. The top-5 global energy companies have seen aggregate revenue/earnings decline of 17% QoQ in the December 2014 quarter; and CY2015 revenues are likely to be down by 31% YoY. Europe is experiencing the culmination of a long drawn out economic crisis, and also political upheavals in Ukraine. Geographies and segments that are experiencing such disruptions are likely to cut down on spending, including IT spending. Core sectors such as US, BFSI and Manufacturing continued to witness growth.