At a time when IT services majors like TCS and Infosys are seeing a negative to sub-1.5% quarter-on-quarter (q-o-q) growth, the top five listed IT engineering services companies have grown in the range of 1.1-9.8% q-o-q.
The average q-o-q revenue growth of IT services companies was -4.9% during the first quarter of the current fiscal. In comparison, IT engineering services companies logged 4.6% revenue growth during the same period.
Pure play IT engineering services companies like LTTS and KPIT reported 8-9% higher revenues in Q1FY24 versus the previous quarter. Not one among the top five listed IT engineering services companies saw a negative sequential revenue growth in Q1.
In contrast, IT services companies logged either a marginal growth or decline in their revenues. TCS reported a revenue of $7.22 billion in Q1FY24, a growth of 0.43% sequentially from $7.19 billion in Q4FY23. Similarly, Infosys’ revenue grew by 1.3% q-o-q. While HCLTech’s sequential revenue declined 1.1%, Wipro’s logged a decline of 2.1% and Tech Mahindra saw a fall of 4%.
Analysts say that even the engineering horizontal in IT services companies is seeing a healthy traction.
The average operating margin for IT services companies was 16.76%, significantly pulled down by Tech Mahindra’s poor show. In contrast, the average operating margin for IT engineering services companies was 19.7%, boosted by Tata Elxsi’s growth of about 30%.
Analysts at EIIRTrend said that just like IT services companies that reached inflection point 20 years ago, IT engineering peers have reached inflection point post pandemic. “In this market, only 6% has been outsourced and less than 2% is offshored. Thus, there is a huge market that is yet to be tapped.”
They added that the perception that the R&D work can’t be outsourced has been dispelled. Today more work is coming to these engineering firms. “Engineering and R&D outsourcing was never for cost reduction. It was more to do with reducing the go-to market time or access to skills. But after the pandemic, companies want to outsource to bring down the cost,” analysts said.
Traditionally, R&D as a percentage of sales is in the lower- to mid-single digit in auto companies. But with the auto industry seeing disruptions like traction in EVs, the need for them to spend on R&D has increased. So, auto firms are outsourcing more R&D work to these tech companies.