A new way of looking IT growth
Source: The Outsource Blog View: 444 Date: 2012-04-05

Analysts make an interesting proposition in a recent note to clients: that it might be increasingly advisable to view revenue growth of large IT companies in year-on-year terms, and give up the fixation with quarter-on-quarter growth.

It gives two reasons for this: First, large IT companies are well penetrated with respect to the potential addressable spend in some industries such as banking and financial services. “They are so strongly entrenched in their important clients’ IT Services spending that they might find it increasingly difficult to defeat/defy the ebb-and-flow and seasonal patterns of large clients’ spending patterns.”, says the report. Secondly, the proportion of consulting work, system integration, and other upstream work is increasing, and these are more cyclical than traditional outsourcing. As such, looking at a q-o-q comparison will not make sense. The report points to the trend in Accenture Plc’s consulting revenues, which invariable declines on a q-o-q basis in Q2 and Q4 of every financial year. It’s little wonder, analysts and investors tracking Accenture view the year-on-year numbers primarily.

Of course, if there is cyclicality, it won’t make much sense to compare y-o-y growth in a particular quarter with that in another quarter. It will make more sense to club two-three quarters together and then view the year-on-year growth pattern, in order to iron out the impact of cyclical factors. But even now, while cyclical factors aren’t playing a major role, it makes immense sense to keep an eye on year-on-year growth trends.

Based on q-o-q growth trends, it appears that Infosys Ltd has caught up with Tata Consultancy Services Ltd in the past two quarters. TCS grew revenues in the September and December quarters by 4.7% and 2.4% in dollar terms, while Infosys’s q-o-q growth stood at 4.5% and 3.4% in these quarters. But the year-on-year growth numbers show that there is still a material difference in the growth rates of the two companies. TCS’s revenues grew by 26% and 20.6% in the two quarters on a y-o-y basis, while Infosys’s revenues grew at much lower rates of 16.7% and 13.9%.

Needless to say, this difference between q-o-q growth trends and y-o-y growth trends is because of the base effect. Keeping this in mind, it makes sense to look at y-o-y growth numbers even before cyclical factors play a greater role in the performance of large Indian IT firms.

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