Looking for the sunrise sectors

Written by Diksha Dutta | Diksha Dutta | Updated: Nov 8 2010, 06:24am hrs
The blue-eyed sector of India Incthe $60 billion Indian IT-ITeS industry is expected to grow five times to $285 billion by 2020. A lot will change and the transition is anticipated to come from different segments and geographies. The verticals which are presently termed emerging such as engineering services, healthcare, travel and logistics, utilities and defence are now being taken seriously by IT heads of the top four Indian software companies comprising TCS, Infosys, Wipro and HCL Technologies. While each of these verticals contribute 5-10% to the revenues of big boys, the mid sized players get a major chunk from these segmentseven stretching to one-third of their revenues.

Traditionally, the industry has depended on verticals like banking, financial services and insurance (BFSI), manufacturing and partly retail or telecommunications to drive their revenues. But the recent times have seen a different trend. According to industry research reports, the total addressable market from these emerging verticals will be $190 billion by 2020.

The most highlighted amongst these is engineering services. Interestingly, the US is not the region that will get the major chunk for this vertical. Shami Khorana, president for HCL America notes, In Japan, engineering services has developed especially well. Traditionally, Japan has been very conservative about outsourcing, but of late, due to cost pressures, Japan is now opening up to outsourcing.

Technology is an integral component in telecom, automotive, healthcare, mobile phones, energy distribution and consumption, computing and consumer electronics verticals. The growth in these industries, in turn have led to rising demand for product engineering services.

Over the past two years, we have seen the scope of product engineering also increase in more traditional industries like manufacturing, food and beverages and BFSI through new technology services like plant automation, mobility solutions and high performance and cloud computing; and in newer industries like retail through design of new point of sale terminals, and the energy and utility sectors through smart grid, smart metering and smart home solutions, says Ayan Mukerji, senior vice-president and global head, product engineering services, Wipro Technologies. As per Nasscom, the global ER&D spend increased from $980 billion in 2008 to $1,100 billion in 2009, a growth of 12%, and is expected to reach $1,400 billion by 2020.

Another area which gained even higher momentum post the US healthcare reforms is the healthcare services. The growth in the healthcare segment is being driven by healthcare reforms, customer centricity initiatives, focus on care management and the strategic importance of bending the cost curve and improving clinical outcomes. Wipro is investing to create capabilities and solution sets in these emerging areas to become the partner of choice of our customers, notes Raman Sapra, general manager and industry headhealthcare, Wipro Technologies. The total healthcare market, which includes payer and provider and insurance, is estimated to be at $80 billion by FY 2020.

Though retail is a vertical to which industry has been catering for a long time, we are still seeing very slow pick up. A spokesperson from Infosys Technologies highlights, Retail and energy and utilities are growing specifically in Europe. In terms of emerging verticals, retail and energy and utilities are fastest growing industry verticals for Infosys. We are also trying to expand our industry footprint by investing in areas like healthcare, pharmaceuticals and life sciences to accelerate growth, he adds. The IT giants data reveals that Infosys works with eight of the top ten retailers in US in their digital commerce space.

TCS, the countrys largest IT exporter has shown consistent performance across verticals but the segment that outshined in its July-September result was the utilities vertical which now gives the company 4.3% revenues, against 2.8% during the same period a year ago.

Shammi from HCL summarises the picture for the company, The last quarter (July/August/September, 2010), though all verticals grew, the growth was led by these verticalsretail and consumer packaged goods, which grew 19.6% QoQ. Healthcare grew by 19.3% QoQ, and manufacturing grew by 10.4% QoQ.

The mid-sized niche

It is important to talk about mid sized companies like Patni and Hexaware Technologies that have created a niche in the healthcare vertical by focusing on it and giving a decent thought to even big companies in this vertical.

Take for instance, Hexaware Technologies: the banking vertical contributes a decent 35% business to the company, but segments like travel and tourism gives it 24% revenues. Other emerging verticals including engineering services, healthcare and utilities together constitute 40% of the company revenues. There is a increase in the volume of business in the healthcare vertical. The drug industry including pharma companies and clinical research are creating more work for IT, says RV Ramanan, president (global delivery), Hexaware Technologies. The company has increased its revenue from the travel vertical from 17% last year to 24% this year. Ramanan adds that the revenues from travel and healthcare segment are expected to increase in the coming future.

The airline segment is also moving from legacy to modernisation on the back of IT support through concepts like e-ticketing or support needed at the airports. This is creating an opportunity for the travel and logistics segment. The perfect example is NIIT Technologies which gets one-third of its revenue from the travel, transportation and logistics vertical and specialises in it. On the other hand, the mid sized companies who solely cater to the outsourcing of engineering services are Quest and Kalki.

Media, entertainment and publishing remains to be one of the verticals which has not been able to flash noticeable revenues on the report cards of top IT giants. But mid sized companies like Tnooz and Arena which are based out of India are providing outsourcing services in animation etc.

Saugata Sengupta, consultant at Tholons Investment Advisory feels, Technology companies have to constantly re-innovate to stay competitive, this trend is also visible in the new verticals and service lines that service providers have added to their repertoire every year. New verticals also have to be targeted since service providers are now confronted with strong entry-barriers due to existing relationships in the industry. This presents an excellent opportunity for niche players to capitalise as they have agility on their sidelarge service providers typically find it difficult to re-adjust at the same pace.