After a year of flattish growth, outlook for Indian IT sector seems to be sanguine as higher spending in key geographies such as United States indicates better time for the industry. Though the industry lobby group, Nasscom has given conservative estimates for FY19, indications of better earnings are already visible.
Apart from higher IT spends in major exporting markets like US and Europe, domestic IT firms are also seeing rising revenue from digital services. Their focus on digital space is part of the global trend which is now slowly moving away from development and maintenance services.
However, there are some worrisome trends as well. Immigration curbs, falling revenue from development and maintenance services, margin pressure, rising wage cost in Indian operations will impact IT firms.
Last quarter results of India’s largest IT exporter TCS is reflective of this trend. Consolidated revenue from operations of TCS in March quarter grew by 3.8 per cent sequentially to Rs 32,075 crore. Similarly, revenue in dollar terms increased 3.9 per cent, which was the highest in last 14 quarters. The company also witnessed higher digital revenue with this vertical contributing 23.8 per cent of total revenue pie in March quarter. Its margin improved by 20 basis points to 25.4 per cent in Q4, up 20 basis points sequentially. Deal wins also remained healthy for the domestic IT firm. “Strong demand in digital across all industry verticals and large transformational deal wins has made this one of our best fourth quarters in recent years. The strong exit allows us to start the new fiscal on a confident note. This is our highest incremental dollar growth in our history,” TCS CEO and managing director Rajesh Gopinathan had said. No wonder, this IT bellwether became the first software services firm to clock a market capitalisation of $100 billion after reporting a strong set of Q4 numbers. This has put TCS in the league of those global giants such as Accenture, United Technologies, GlaxoSmithKline, Lockheed Martin, and Nike among others.
Meanwhile, with Salil Parekh at the helm, the country’s second largest IT services provider Infosys is also charting a steady path of progress. In Q4, the company has indicated that it has moved beyond recent management disruption and has presented a roadmap for next three years. While Infosys reported incremental revenue growth of $731 million in the fourth quarter ending March, it has guided for 6-8% constant currency revenue growth for FY19. Revenue in dollar terms is likely to see a jump of 7-9% in the current financial year. Though its margin guidance is a little disappointing, still most brokerage firms have a ‘buy’ rating on Infosys. In a report, Kotak Institutional Equities has said, “Infosys’ revenue growth guidance of 6-8 per cent signals acceleration in growth. Strategic priorities have caused Infosys to cut margin guidance band which is disappointing but necessary to build muscles in digital business.”
Apart from TCS and Infosys, the third biggest IT firm Wipro has also indicated that growth outlook has improved and the company would see better results going ahead. “Growth will be stronger during the second quarter of the current fiscal following traction in digital projects,” CEO of Wipro, Abidali Neemuchwala had said post announcement of its Q4 results.
Despite tangible signs of improving business climate, there are some areas which can emerge as a major challenge to prospects of IT companies. Factors like falling revenue from development and maintenance services with rise of digital has been flagged up as a major threat to earnings of IT firms. With rapid growth of automation, artificial intelligence, big data and analytics, machine learning and Internet of Things (IoT), the demand for traditional maintenance services are slowly declining. In such a scenario, future growth of domestic IT sector will hinge on rapid shifting in skills to serve the clients in digital space. Currently, contribution of digital revenue stands at around 20-25 per cent range for domestic biggies, while it is around half of the total revenue for global tech firms like Accenture and IBM.
Immigration curbs imposed by American government through restricting H-1B visa issuance is another major challenge for domestic IT firms. With increased local hiring at the client site, margin pressure is evident. Apart from these factors, rising wage cost in Indian operations is also impacting the cost arbitrage which Indian companies used to enjoy for a long time.
The $167 billion domestic IT industry is going through a transition. As revenue from digital services rises, it will be imperative for Indian IT firms to ramp up their service delivery capabilities in this space to sustain future growth. Also, how domestic IT firms negotiate the tricky path of US regulations with regard to outsourcing will largely determine their performance.