IT negotiates a tight corner

Written by Debojyoti Ghosh | Debojyoti Ghosh | P P Thimmaya | Updated: Jan 28 2013, 08:20am hrs
The combined revenues of the top-four players in the sector grew by over 16% year-on-year, while profits showed an increase of 18%. However, this is not anywhere close to the quantum of growth the industry has achieved in the past

Strange as it may seem, drawing up a standard for the Indian IT industry has become a difficult task. While the common concerns are slowdown in client decisions, pricing decline, currency issues and margins, the impact on each has varied. With differentiation in services and customer concentration coming into play, the sectors dynamics are changing. Long-term focus of the countrys software services biggies hinges on growing newer technologies such as cloud, mobility, big data and social media, which are at present small contributors to the overall revenue.

IT majors are also giving geographical spread a serious thought in addition to the focus on newer offerings and high margin businesses such as consulting and analytics. During the October-December period most of the top-tier players recorded robust growth beyond its traditional key markets US and Europe, which account for close to 80% of the countrys IT export revenue.

Infosys recorded a bumper 44.7% sequential growth in India domestic business, while rest of the world grew 7.4%. For India largest IT company TCS, India grew 4.8% sequentially. Wipro posted a growth of 3.7% in India and Middle East quarter-on-quarter. Though companies are trying hard to reduce its concentration on America for their revenue, it will continue to be a telling factor for the industry. Currently Infosys derives 61% of its revenues from north America, while for TCS it is 53%. Wipro gets under 50% revenues from the continent.

The sector has been vehemently focusing on diversifying its geographical risk by reducing its over dependency on US and Europe. The effort has paid-off to some extent with a slight increase in the share of revenues (8.4% in FY06 to 9.8% in FY12) from other emerging geographies like Asia-pacific, Philippines, Africa, said Sanjay Dhawan, leader technology, PwC India, adding that this might not be good enough for the sector to completely insulate itself from any turmoil in key markets like US and Europe.

But the share from emerging geographies is likely to go up further in the coming quarters. And through proper risk mitigation and hedging strategies, the impact of currency fluctuations can be combated to a certain extent, he added.

December quarter, traditionally the weak period for the $70 billion industry, has turned out to be a surprise for the market, which was expecting a muted performance. Even as concerns on demand from the US and Europe cloud the horizon, top-tier companies have still managed to post healthy numbers and protecting volumes.

Of the pack, only Wipro, bucked the trend with a 1% decline in volume owing to lesser business in the non-discretionary spend and a negative growth of 0.7% sequentially in the US region. Analysts pointed out that Wipros poor performance is more to do with clients and verticals the company is catering to and less about the overall market in the US.

TCS revenue from North America grew 2.5% sequentially, while it was 1.6% for Infosys. Noida-headquartered HCL Technologies recorded a growth of 3.4% quarter-on-quarter in Americas. In terms of volume HCL Technologies posted a 3% growth, TCS 1.25% and Infosys1.5%.

The combined revenues of the top-four players in the sector grew by over 16% year-on-year, while profits showed an increase of 18%. However, Dhawan of PwC pointed out that this is not anywhere close to the quantum of growth the industry has achieved in the past. If you compare the results of Q312 with Q311, the top-4 companies combined achieved an impressive revenue and profit growth of 32% and 24% respectively.

In an interaction with FE after the quarterly results, Infosys CEO SD Shibulal said, In this quarter we have performed well and if one dissect the numbers, the growth has been more broad-based. In consulting and system integration segment we grew by 8% which is higher than companys average. The aspiration is to create a balanced portfolio.

Analysts are expecting this year to spell a turnaround for the Indian IT sector. The pent-up demand, geographical diversification and focus on niche service offerings will help drive the business growth. The global IT spending this year is also expected to increase. And with a high technology adoption by the Indian government, the domestic IT spending is also bound to go up, added Dhawan.

This could also be the time when the Indian IT industry could see a real turnaround after many false hopes in the past. The bottoming out for the industry has happened and now growth is coming back, said, Sudin Apte, CEO, Offshore Insights, an IT-BPO advisory firm. However, he cautioned that it is very unlikely to be any kind of booming growth but more in the lower double digit range.

There are also very clear signs emerging from the market that the industry will have to deliver much more than what they have in the past. This would actually require them to be more aligned with the current demands of the markets, where customers are asking for very pointed technology outcomes from the contracts they sign unlike in the past where only the efforts were being measured. According to Apte, there are more number of transformational IT deals in the market which will call for building newer capabilities by the IT bigwigs.

Experts feel, today the countrys software-services companies face the dilemma of which business verticals or segments they would like to focus anticipating good growth in the near future. Clearly, the bets they would have to make could have a long term bearing on the business. TK Kurien, CEOIT business, Wipro said that the company will continue to focus both on the discretionary and non-discretionary parts of IT spending, adding, Getting the right set of portfolio of services is critical for us to grow.

The year 2013 is likely to define a lot of aspects for the Indian IT sector as they face rapid technology changes and different set of demands from the market. This will most probably witness an increasing polarisation among the top players and it could be anybodys guess on who the winners will be.