It is hard to imagine the great Indian IT folklore without the banking and financial services (BFSI) industry. What could have happened if in the late 90s, big American banks did not outsource Y2K work to India? Bank of America, American Express, Goldman Sachs and Citibank among others, who required armies of software engineers and programmers to fix glitches in computer systems, gave the Indian IT services industry a booster dose. Without them, the industry wouldn?t have been the $76 billion giant that it is today.
The industry?s story, nevertheless, has not been just about BFSI. While it continues to contribute the bulk of its revenues, about 40%, top-tier Indian IT firms have successfully penetrated verticals such as manufacturing. Now, even more sectors are opening up. For most firms, diversifying beyond BFSI has become a strategic focus?the balance sheet recession of 2008-09 and the current global economic turmoil have made volumes from the BFSI sector a tad unpredictable. While financial services firms would still remain the biggest spenders on technology?they are expected to spend more than $350 billion in 2011?market watchers feel that the sovereign debt crisis in Europe and slow recovery in the US could mean that pricing from the vertical will be under pressure.
Veteran banker and Infosys chairman KV Kamath therefore feels that the firm needs a course correction and expand into verticals such as healthcare and government. Cognizant, which has more than 40% exposure to BFSI, is expanding in retail and communication. Wipro has diversified well into the energy and utilities vertical. While, for HCL Technologies, manufacturing was the largest revenue contributor for the quarter ended September.
In the recession year of 2009, a Nasscom-McKinsey study had pointed out opportunities in new sectors. The study showed that the total addressable market for technology and business services will expand three-fold, from $500 billion to about $1.6 trillion by 2020. While core markets will increase by one-and-a-half times, contributing 20% of incremental growth, the remaining 80% is likely to come from new verticals, customer segments and geographies. Verticals identified as emerging included the public sector, healthcare, media and utilities?an addressable opportunity of around $190 billion to $220 billion is now expected from these sectors by 2020.
Aiding spending on IT from new verticals is a confluence of different factors?the pressure to free up dollars to invest in core businesses, consumerisation of IT, big data and the need for analytics, the mushrooming of mobility and other channels to reach out to customers. Many of these factors are at play in the retail vertical, for instance, a strategic area for most top tier and mid-sized IT companies. R Chandrasekaran, president and MD of Cognizant?s Global Delivery, says that retail companies have to invest in technologies to enhance customer experience. ?Newer channels are opening up. Earlier, we used to talk about brick and mortar to online. Now, there is mobile technology. It has opened up lot more opportunities and challenges for retail companies. They want to invest in technology to enhance customer experience and thereby, enhance their business effectiveness. When you open new channels of business, you have to also focus on the back-end integration. Multi-channel integration of supply chain is also very important,? he notes.
As part of its growth strategy, Wipro is looking at four verticals as momentum verticals: healthcare and life sciences, energy and utilities, retail and consumer packaged goods (CPG) and BFSI. ?These momentum verticals are going to drive growth for us. What we have done as part of our strategy is to clearly align investments and growth opportunities. We are growing in other businesses as well; however we feel that these businesses would grow at a faster clip,? says Rajan Kohli, chief marketing officer, IT Business, Wipro.
?From a customer perspective, the growth in energy utilities (E&U) industry is led by technology investments in exploration, safety and sustainable energy resources like smart grids and green IT as well as government incentives linked to stimulus spending,? adds Kohli.
According to IDC, utility companies in just Western Europe will grow IT spending by 6.2% annually, from $9.1 billion this year to $11.7 billion in 2015. ?Specific to oil and gas, areas like digital oil fields where an overall consulting approach and agile data access is key, petro-technical global data management and petroleum application services are becoming focus areas. Wipro sees E&U as a high growth vertical with huge potential. Our past investments in terms of people and competencies have helped us post strong growth in the last few quarters,? says Kohli.
For Infosys, during the second quarter ended September, manufacturing vertical, which contributed 20.2% to revenue, registered a 3.5% qoq growth. ?The company is seeing IT spending coming in the manufacturing industry segment from clients in terms of work related to harmonising processes and transformation to gain cost efficiency and simplicity,? noted Angel Broking.
Retail and life sciences segment also emerged as one of the major growth driver for Infosys, growing by 5.4% qoq. Revenue from retail and consumer packaged goods (CPG) grew by 1.2% sequentially, led by spending in the digital commerce and digital marketing space.
?All our verticals have seen growth ranging between 3.5% – 5.5% in the past quarter. Out of 45 client-wins in Q2 FY12, 19 of them are from healthcare, life sciences and energy and utilities sectors,? says a spokesperson from Infosys. The IT major is investing in new products and platforms including digital marketing, social commerce, and cloud services to drive growth across verticals.
Sanjeev Hota, senior research analyst, Sharekhan, says, ?On a like-to-like comparison, manufacturing has done well for the top four, followed by retail and utility. For Infosys, it was mainly manufacturing and utility; for Wipro it was spread across verticals such as retail and transportation. HCL did well in manufacturing, retail, and consumer product group, and for TCS, it was retail, as well as energy and utility.?
According to Hota, going forward, the number one pick for a growth driver would be retail as well and healthcare, followed by manufacturing, and energy and utility. ?Momentum in these verticals is likely to continue over the coming quarters,? he says.
During the September quarter, manufacturing was the largest revenue contributor, for HCL Technologies, growing at 8.2% sequentially. The vertical formed 29% of HCL Tech?s total revenue of R4651 crore. According to analysts, growth in this vertical was led by demand in for business needs related to operational efficiency, cost reduction and product development. The retail and consumer product group vertical emerged as the company?s primary growth driver, with its revenue growing by 12.0% qoq, contributing to 8.5% of the total revenue. In addition, the energy, utilities and public sector segment and the media, publishing and entertainment segment posted revenue growth of 1.6% and 0.4% qoq, respectively.
According to analysts from Angel Broking, for TCS, besides its anchor vertical of BFSI, growth was led primarily by energy and utilities during the September quarter, which grew by 18.5% qoq, as well as retail and distribution, growing at 9.2% qoq. The two verticals contributed 4.3% and 12.1% respectively out of TCS? total revenue of R11,633 crore for the quarter. Travel and hospitality, manufacturing, and life sciences and healthcare posted qoq revenue growths of 7.5%, 7.4% and 6.7% respectively.