It is that time of the year when corporate India announces its results for the second quarter of the fiscal. The top-five Indian IT services companies, namely Tata Consultancy Services, Infosys Technologies, Wipro Ltd, Satyam Computer Services and HCL Technologies have again produced fantastic quarterly numbers, better than what stock analysts expected. Some of the mid-size IT services companies too declared good numbers. Recently listed mid-size IT services company Tech Mahindra, part of the diversified Mahindra & Mahindra Group, has posted 373% year-on-year and 66% quarter-on-quarter rise in its net profit during the second quarter. i-flex solutions, the Indian subsidiary of world’s largest enterprise software company Oracle Corp, has shown 144% year-on-year and 166% quarter-on-quarter increase in its net income during the quarter. Overall the sector has boosted investors’ confidence.

The top five IT and BPO services companies registered average growth of approximately 39% year-on-year (YoY) during the second quarter (Q2) ended September 2006. The average quarter-on-quarter (QoQ) growth was 10%. It’s important to note that top line growth of these five companies remained in a narrow band of 30%-45% reflecting consistency across the industry. The highest growth of 45% in the top line was achieved by India’s largest IT company— Tata Consultancy Services. In the lowest-end of the top five was Satyam Computer Services that registered a growth of 31%. The company had already given guidance earlier for a subdued performance.

Net income of the top five companies grew by 41% YoY, and 10% QoQ on an average. Here the top performer was Infosys Technologies Ltd., the second largest IT services exporter of India, which came out with 44% YoY growth in its bottom line. Interestingly, the top three companies registered more than 13% QoQ growth in their net income. The pressure on margins due to salary hikes in the past quarter resulted in a negative growth of 13% in the net income of Satyam Computer, but that was on expected lines.

The growth in the IT services industry in India is concentrated in the tier-I companies, and even among the top five companies, the top three have performed better in the second quarter. TCS, Infosys and Wipro have gone far ahead of even the fourth and fifth largest companies Satyam and HCL Technologies.

Not only this, the difference in the annual revenue of TCS and Infosys is set to cross $1 billion in this financial year, as TCS is approaching $4 billion in annual revenue, while Infosys is expected to cross the mark of $3 billion revenue in 2006-07.

TCS: The largest, and one of the fastest

Tata Consultancy Services (TCS), the largest IT services company of India, surpassed the other companies, not only in terms of absolute growth but also the pace of growth. The company’s revenue of $975 million in the second quarter ended September 2006, represented a growth of 45% year-on-year (YoY) and 8% quarter-on-quarter (QoQ). It’s net income stood at $216 million, up 41% YoY and 15% QoQ. It improved the cost of revenue from 57% of its total revenue in first quarter (Q1FY07) to 55% in the second quarter. The gross margin improved by 227 basis points (bps) compared to the Q1FY07 to reach at 45%. Also, the net income margin improved by 131 bps compared to the Q1FY07 to reach at 22%.

The new client additions also remained robust, as TCS added 58 new clients during the second quarter against 62 clients in the first quarter. And now, 105 clients are contributing more than $5 million per annum compared to 97 in the previous quarter, while the number of $50 million clients has gone up to 15 in Q2from 10 in Q1. With the net addition of 6,663 employees in the second quarter, the total employee base of TCS rose to 78,028. With the current pace of hiring, TCS is set to become a company of more than 100,000 employees in less than a year from now.

Infosys:

Almost all the top brokerages of India as well as some foreign brokerages were quick to acknowledge the fact that the second quarter results declared by Infosys far surpassed their expectations. Apparently, the analysts had not expected the operating margin of the company to improve by 260 basis points to 32% from 29%, which resulted in 44% YoY and 14% QoQ growth in its net income that reached $199 million. Its revenue surged 42% YoY and 13% QoQ to reach at $746 million.

The earning per American Depository Share (ADS) improved to 36 cents in the second quarter from 25 cents in the corresponding quarter last year. Company added 45 new clients during the quarter. The number of clients contributing more than $5 million has gone up to 97 in the Q2FY07 from 94 in the Q1FY07, while the number of $50 million clients improved to 12 from 11 during this period. The number of employees has gone up to 66,150 at the end of second quarter against 58,409 in the first quarter. The net addition of 7,741 employees was higher than 5,694 employees in the first quarter.

Wipro:

Although the total revenue of Wipro is higher than the revenue of Infosys, Wipro is considered as the third largest IT services company after TCS and Infosys because the total revenue of Wipro includes the income from its consumer care and lighting products. The total revenue of the company grew by 35% YoY and 12% QoQ to reach at $765 million in the second quarter. The overall revenue from IT and BPO services, however, grew 35% YoY and 11% QoQ to reach at $700 million. The net income of the company was at $151.54 million, up 41% YoY and 13% QoQ.

Wipro has added 54 new clients during the quarter in the global IT services and products space, 11 of which were Global 500 or Fortune 1000 clients. The number of $5 million-plus clients has gone up to 102 in the second quarter against 94 in the first quarter. The net addition in the number of employees was 5,328 taking the total number at 67,179 employees including 45,824 employees in IT services and products business and 15,355 employees in the BPO segment.

Satyam:

Prima-facie the results of Satyam Computer Services, the fourth largest IT services company of India, look dismal, as its net income declined 13% QoQ to drop at $65 million in Q2FY07, compared to $75 million in Q1FY07. The analysts, however, seem to be satisfied with the results as the decline was a direct fall out of steep salary hike implemented in the second quarter. And in fact, the decline in the net income was less than what analysts had predicted. Satyam was facing relatively higher attrition rate, and the salary hike seems to have an instant positive impact on the same. Attrition has come down from 19% to 18% (TTM) during the quarter as a direct consequence of the aggressive measures taken on the compensation front. The revenue of the company grew 31% YoY and 9% QoQ to reach at $352 million in the second quarter.

Satyam won 35 new customers in the second quarter. It has added 4,025 employees during the quarter, which is the highest ever quarterly recruitment taking the total number at 31,659 employees. Company has revised the annual revenue guidance upwards to about $1.4 billion from the earlier guidance of $1.35 billion-$1.37 billion as per Indian GAAP. It expects the annual growth rate to be 35% (Indian GAAP).

HCL Technologies:

Although the company claims that its emphasis on large multi-service deals has started paying off, HCL Technologies had only a few gains in the July-September 2006 quarter (Q1FY07 for HCL Tech) in terms of large-deals compared to the previous quarter (Q4FY06). The company has reported only one multi-year, multi-service deal worth $70 million with Teradyne, a supplier of automatic test equipment. In terms of execution of previous large-deals, of course, the company is on track as it claimed to the media. It posted revenue of $300 million in the July-September 2006 quarter, up 36% YoY and 10% QoQ. The net income improved 43% YoY and 8% QoQ to reach at $54 million during the quarter. The EBIDTA margin was slightly lower at 22% during the July-September 2006 quarter compared to 22.4% in the previous quarter, and 22.2% in the same quarter last year.

The number of clients contributing $5 million-plus to its annual revenue has gone up to 41 during the July-September 2006 quarter, compared to 35 in the previous quarter. Company has increased its employee-base by 12% to 36,452 during the quarter with net addition of 3,826 employees. The highest ever net addition of 1,769 employees in its BPO division has taken the total employee strength of the division to the 11,000 mark.