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Falling crude prices hit Indian IT firms like Infosys, Wipro, TCS energy verticals

Falling crude prices and cost cutting measures by oil-producing companies has resulted in a steady decline in revenue contribution from the energy vertical for large Indian IT services companies like Infosys, Wipro and TCS.

Crude oil prices
The recent rally in commodity prices is not supported by fundamentals in the physical markets, Goldman Sachs said.

The energy vertical, which traditionally has been a strong growth area for the Indian IT sector, has not lived up to expectations of late due to falling crude prices and cost cutting measures by oil-producing companies. This has resulted in a steady decline in revenue contribution from the energy vertical for large Indian IT services companies like Infosys, Wipro and TCS and it is unlikely to see a turnaround in the short term.

Companies like Wipro and Infosys have made significant investments in the energy vertical through long-term contracts and acquisitions, though for TCS it has been a relatively smaller business given its size. For example in the case of Wipro, at the end of second quarter of FY16, the energy segment accounted for 14.7% of its revenue as compared to 16.8% a year ago.

Wipro CEO T K Kurien in an investor call following its second quarter results on the energy and utilities business said, “It has been a big drag for the past 18-months after many years of actually significantly higher double digit growth. It has typically been in the teens at worse. So we expect that customers especially in the segment will go through cycle and as they go through cycle we will have reduction.”

It has been a similar case with Infosys also which witnessed the revenue contribution from the energy vertical dropping from 5.5% to 4.7% in the last one year. U B Pravin Rao, chief operating officer, Infosys said, “Energy continues to be challenged because of the oil prices and we are now seeing a second wave of cost cutting in energy companies.”

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For TCS the energy segment has been a relatively smaller contributor and does not see any uptick in momentum of large deals in this area.

The energy segment had picked up steam in the recent past when the crude oil prices were rising and investments made by the companies. In fact, Wipro in July last year had entered into a long-term outsourcing cum buyout deal with Canadian company ATCO valued at $1.2 billion which was focused on the energy segment.

Infosys around a month back announced the acquisition of an energy segment-focused IT company Noah Consulting for $70 million. Sanjay Purohit, EVP and Global Head of Infosys Consulting said, “Our oil and gas clients are adjusting to a new normal of lower oil prices. There is an urgency to improve the efficiency and effectiveness of their operations.”

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First published on: 17-11-2015 at 00:43 IST
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