Vendor consolidation to bring back IT revenues by FY2011

Written by Rachana Khanzode | Rupsa Ray | Mumbai | Updated: Mar 27 2009, 05:03am hrs
The revenues of top Indian IT companies are expected to bounce back in FY 2011, after taking a hit in FY 2010 due to cut in spending budget, say experts.

Vendor consolidation will be the main reason to bring back IT revenues in FY 2011 at a growth rate of 7-12% YoY, as it will bring high gross margins in the range of 35-50%, driving cost savings on sales, general and administrative expenses. Furthermore, it will increase productivity and reduce overall project management overhead costs.

This consolidation is expected to bring in multi-year contracts resulting in pricing power for top IT companies, and also enable Indian majors to grab a larger pie of the Indian IT export market.

With these cost benefits, vendors are looking at volume discounts ranging 5-10% on incremental volumes, said a new report from UBS.

Meanwhile, Gartner, in its recent report, said that the IT industry will see budget cuts of up to 20%, while prices of IT services would shrink between 5-20% during 2009 and 2010.

UBS in its report said that a 5% decline in IT spending would bring down the probability of revenue growth to 78.6%, while a 10% decline would bring down the growth probability to 60%; a 15% decline will reduce it to 28.6% and 20% decline to 7.1%.

Industry veterans indicate that if IT budget cuts are less than 10%, top-tier IT vendors would see revenue growth in FY10. However, a budget cut beyond 10% would bring in revenue losses for these companies.

Tata Consultancy Services (TCS) recently said that they have witnessed budget cuts from clients of up to 5-10%. N Chandrasekaran, COO and ED, TCS, said, As of now there are budget cuts of up to 5-10% depending on industries. However, some clients are showing less than 5% cuts in budgets.

Harit Shah, analyst, Angel Broking, said, While individual companies might see growth in revenues due to vendor consolidation, the overall industry revenue growth will see a downturn.

UBS added in its report that top-tier IT companies will report dollar revenue declines of 5-7% year-on-year in FY10, and that revenue declines will be steeper for tier-II IT companies.

Meanwhile, the top-three Indian IT companies--TCS, Infosys and Wipro--have increased their share of Indian IT exports from 26% in FY05 to 31% in FY08. This is expected to increase to 36% by FY12.