July 04, 2020
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Infotech Needs An Upgrade

Growth has slowed down for Indian IT companies. They will need to adapt quickly.

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Infotech Needs An Upgrade
Illustration by R. Prasad
Infotech Needs An Upgrade
outlookindia.com
2017-04-22T11:15:37+0530

Earlier in the month, industry bellwether Infosys turned around less than expected results with a 2.8 per cent dip in revenue and an extremely ­muted guidance for the coming year, but no one was surprised. For India’s IT sector, the writing has been on the wall for some time.

On Tuesday, India’s largest IT services company, TCS, announced results that barely managed to meet its own estimates and did not live up to  market expectati­ons. Usually the best performing among Tier I Indian IT companies, TCS showed low single digit growth and reported a smal­ler-than-expected rise in fourth­-quarter earnings. It’s consolidated net profit rose by just 4.2 per cent to Rs 6,608 crore in the last quarter of FY (Financial Year) 17, from Rs 6,340 crore in the previous year. Analysts had expected profits to be higher. The only company whose guidance is a shade better is Cognizant, which too is talking about single digit growth in the next quarter.

The dismal results come at a time when the $155-billion Indian IT sector is facing strong currency headwinds and uncertainties in its biggest market—the US, over changing H-1B visa rules.

In the January-March period, Infosys recorded a 0.7 per cent sequential rise in dollar revenue to $2.57 billion, ending FY17 with just 7.4 per cent annual growth. Its net profit declined by 0.8 per cent in the January-March quarter. In rupee terms, the revenue declined sequentially by 0.9 per cent while net profit slumped by 2.8 per cent.

Analysts are already reading bad news from Infosys’ numbers. “We cannot see Infosys in isolation. Tier 1 IT companies like Infosys, TCS, Wipro and Tech Mahindra set the tone for the year and in the last couple of quarters their Q on Q (Quarter over Quarter) revenue growth has not been encouraging,” says Thomas George, head of Cybermedia Research.

Over the last one year or so, Indian IT companies have been performing badly and showing subdued performance and revenues for three straight quarters, and the predictions are quite grim. Infosys has predicted a 6.5-8.5 per cent growth for the current year, which is way below industry standards and even below what industry body Nasscom predicted for the previous quarter.

Looking at the downturn, Nasscom, for the first time in two decades, had deferred its guidance for 2017-18 by a quarter. Its guidance is expected to come in May and by the look of things, it is not going to be a big one.

“The Infosys results are reflective of the challenges being faced by the Indian IT industry. Other companies are also likely to come out with less than flattering results for the last quarter of FY17,” predicts Jaideep Mehta, MD, IDC, India & South Asia. “The fiscal 2017-18 story is not good either and will be challenging. In fact the Nasscom guidance last year was optimistic as the industry is exp­ected to perform worse.”

To bring things into context, last year, Infosys had revised its guidance for 2016-17 thrice before settling down at 8.4-8.8 per cent. But it could not even meet that. This year’s prediction is much lower. Experts point out to several developments which have caused this downturn. Primary among them has been the constant appreciation of the Indian rupee over the last couple of months which has badly hit profit margins and revenues of companies.

“Any appreciation in the rupee will hurt the IT companies as a 3-3.5 per cent appreciation in the Indian rupee has an impact of 5-6 per cent on earnings per share,” explains Apurva Prasad, senior analyst with HDFC securities.  In FY18, any appreciation in the rupee can impact the margins by about 80 basis points, say analysts.

IT Cos need to catch up with the shift from ­traditional modes of ­service ­delivery to ­digital modes

Among the reasons for the bad numbers are also shrinking IT spends by large clients of Indian IT companies. Budget allocation among larger clients has been on a decline across the globe. This has also hit numbers for Indian IT companies. This is because the clients themselves have not been doing well. “But for BFSI (banking, financial services and insurance), growth in other sectors like manufacturing and retail have been uneven and there has been no recovery,” says George. For most of the companies, revenue of their top 10 clients has seen negative growth while the top 6-10 clients have seen revenue grow by just 3-5 per cent in the last three years.

Add to that the fact that consulting, a growing area worldwide, doesn’t have much exposure from Indian companies, who have just about 6-8 per cent of their business in consulting, though some like Infosys and TCS are increasing their spread in this area.

What is perhaps hurting the companies most is the fact that new deals are happening only from contract renewals where negotiations are on. Many of these contracts may not get renewed. There is also a dip in the contract value in large deals that are getting signed or renewed. As a result, the contract values of Indian IT companies have shrunk significantly. For instance, the total contract value of Infosys for FY 17 was $ 3,486 million, which was lower than the previous year’s $3,860 million. This year’s may be even lower. Other companies would paint a similar picture though TCS expects the next two quarters to be good, an optimism that comes from the fact that the first and second quarters of every year are high growth quarters.

Also, for many clients the actual spending is happening in the digital space, where Indian companies have been caught napping. They don’t have large capabilities and have not been able to capitalise in this area. Smaller players have been able to grab this space by offering great prices and ­getting these contracts. Although, Indian companies have started waking up to this reality now.

Another issue that has taken companies off guard is that of technical disruption. There’s a distinct shift towards cloud and automation, where the Indian companies are still catching up.

On top of these is the H-1B visa issue. With US President Donald Trump’s latest salvo against H-1B visa holders, things might get even more difficult for Indian IT companies in the US. This is a matter of big concern as the US still accounts for a lion’s share of over 60 per cent of most Tier I IT companies’ revenues. Traditionally, Indian IT companies have counted heavily on the US and the current changes might impact some of their bottom lines and competitiveness. Some companies will have to explore more opportunities in the Asia Pacific market. The visa issue has, for the last year or so, forced Indian IT companies to increase local hiring, which has hit margins of companies. “TCS is employing locally, others are too. This is hitting margins as local hiring is expensive. There is a lot of cost pressure,” says George.

Experts feel it will be difficult for the companies to show good performance in the next two quarters. Most expect low single digit growth in the next two quarters. Analysts feel, the IT sector growth this year will be lower than FY17 at around 6-8 per cent.

“The IT Industry will find it very difficult to maintain the past performance of growth. There is a massive shift happening from traditional modes of delivering services towards more industrialised and digital modes,” says D.D. Mishra, research director, Gartner. “This is an era of non-linear growth. This again is coupled with cannibalisation of some of the revenue due to cloud and automation, which will continue to make it very challenging for many companies in the near future.” Further, even geo-political changes have impacted the situation. The market has become more price competitive as well.

The next 2-3 years will be challenging for India’s IT sector and it depends how the companies integrate innovation, increase digital revenue and leverage new opportunities which are generated from the Internet of Things (IoT), cloud and robotics.

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