The year 2016-17 so far has been a tough year for the Indian IT companies. The slowing global economy and the uncertainties post Brexit hit order flows as companies axed their IT budgets. Their spending on digital technologies continued; however, as Indian IT service players lacked competence in the space, they lost the opportunity.

Revenue growth for the top two players — TCS and Infosys, dropped sharply in the first nine months of the year. Infosys saw dollar revenue growth drop from 10.9 per cent (year-on-year) in the June 2016 quarter to 5.9 per cent in the December 2016 quarter. Similarly, TCS’ revenue growth slid from 8.1 per cent in the first quarter to 5.8per cent in the third quarter. Among verticals, the slowdown in BFSI — the largest segment for Indian IT service providers, was the sharpest. Retail, energy and manufacturing businesses too were weak.

Wipro, HCL Technologies and Tech Mahindra haven’t yet declared results for the December quarter. In the first half of the year, the performance of these companies too was not up to the mark. Profit margins in the current year have also been weak due to rising competition pressure and cut in prices by players.

However, some of the biggies, including TCS, Infosys and HCL Technologies, were able to hold on to their profit margins from declining, thanks to improved operational efficiency. TCS, for instance, has maintained operating profit margins at 25-26 per cent in the last three quarters. Infosys’ operating margins have been in the band of 24-25 per cent. Wipro, however, saw its margins being eroded. The company’s operating profit margin stood at 17.8 per cent in the first six months of the year, down from 20.5 per cent in the previous year, mainly due to restructuring of businesses in some geographies. In November, Nasscom, the industry body, slashed the growth (export) estimates for the IT industry in 2016-17 to 8-10 per cent from 10-12 per cent projected at the beginning of the year.

Valuations

IT stocks have taken a beating in the market in the last one year. Starting with the gloom business environment in the US, then Brexit in June and finally Donald Trump’s win in the US Presidential election in November have all worked against the IT stocks.

Trump had promised re-writing of the US immigration policy and bringing back jobs lost to H-1B visa, if he wins. Infosys and TCS are trading in a valuation of 15-17 times now, on a trailing 12 months earnings basis, down from about 21-22 times it quoted in April of last year.