India's four largest IT companies have beaten market expectations with their recent quarterly results, and are gearing up to compete for US$50 billion worth of mega deals up for renewal this year. They will face fierce competition, though, domestically and from foreign players, and will need to tap their scale, niche strengths, and pricing strategy to grab a piece of the pie.
TCS, Infosys, Wipro, and HCL Technologies outperformed market expectations in their fourth-quarter 2012 results, with revenues--excluding Wipro--growing between 2.9 percent and 5.7 percent over the previous quarter. While Wipro's performance was not as impressive, it reported 18 percent quarter-on-quarter rise in its consolidated net profit.
These results are seen as indicators that the previous year of slow growth may be coming to an end. "The results look encouraging," Arup Roy, Gartner's principal research analyst, told ZDNet in a phone interview. "There is rebound coming from several quarters, especially for Infosys."
He pointed to improving business confidence as the key reason for the rebound. "Although we have not come out of the global slowdown and there is no robust growth yet, there are early signs of a revival," Roy said. "The sentiment is more positive globally because we are unlikely to see another trough for some time to come."
Sundararaman Viswanathan, manager of consulting, Zinnov, concurred. He said the IT industry is very dependent on end-user sentiments. If the perception is that the business will not do well, the tendency is to reduce the IT spend, Viswanathan said. In the United States, particularly, Roy noted there is more certainty with the re-election of Barack Obama.
Roy said: "The rest of the challenges still remain--the cost pressures, buyer behavior, competition from the MNCs, currency fluctuations, and so on."
According to K Purushothaman, managing director of Protiviti Consulting, the better performance came about due to the depreciation in the Indian rupee and new clients some of these Indian players have acquired. "Additional clients have come in sectors which were non-existent such as mobile payments, LTE, and 4G," Purushothaman said in a phone interview.
The results of HCL and Infosys, in particular, have taken analysts by surprise. The former reported a 68.5 percent jump in consolidated net profit, and its headcount rose from 83,076 in November to 85,194 in the end of December. It won six large deals, securing to a billion-dollar booking fourth quarter. In total, HCL won 418 deals during the quarter, compared to 362 in the same quarter 2011.
Infosys saw significant change in both mindset and performance. Known traditionally for being profit-margin conscious, Infosys is now beginning to show increased flexibility on pricing and greater willingness to take on deals that it earlier would have shunned, analysts noted.
The IT vendor improved its revenues through new deals, including 13 in Europe. It also acquired Switzerland-based consultancy Lodestone Holdings, which is bringing in more revenues.
"Most large Indian IT companies have carved a niche for themselves," Zinnov's Viswanathan noted. For instance, HCL is strong in infrastructure management, while Wipro is strong in engineering R&D (research and development) and product engineering. Infosys, on the other hand, is strong in products and platforms.
Mega deals to be renewed, intense competition expected
The biggest challenge the Indian IT players faced was that mega deals just were not coming their way. Major contracts were broken down into smaller ones, and they--barring HCL--struggled to bag large deals.
This year, however, software outsourcing deals worth nearly US$50 billion--about half the size of India's IT industry--are up for renewal. The battle for these contracts is expected to be fierce, with most IT vendors getting aggressive on price cuts. It was intensive discounting that recently enabled HCL to win a large contract from Deutsche Bank, previously a major client of Infosys.
These mega deals span nearly 10 years and include outsourcing contracts from Procter & Gamble, Bank of America, American Express, and Unilever.
These large Indian IT players have the scale to compete. They are also financially stable.
- Arup Roy, Gartner
"When these deals were forged, multinational players like Accenture, IBM, and Capgemini were at a disadvantage since they did not have much of a presence in countries like India," Viswanathan said. Today, 30 percent of their workforce is in India.
But, the Indian players too have come a long way and carved a niche for themselves.
According to Roy, many of the large Indian players stand to gain. "They have the scale to compete. They are also financially stable," he noted.
Additionally, Viswanathan said, many of these enterprise clients have legacy systems so the deals are likely to be transformational in nature. "A lot of restructuring is likely to happen, and Indian players are always at an advantage. Nonetheless, the MNC players will give their Indian counterparts a tough fight," he added.
More importantly, most of the large Indian IT players have specific teams chasing these large deals. "This augurs well for the Indian IT industry," Roy said. Moreover, Indian IT companies are known to constantly work on reducing costs and increasing efficiencies. "They are the kings of offshoring as they are working on a robust global delivery model," he said.
New opportunities and challenges
According to Viswanathan, Indian IT companies have been working on their sales pitch for some time now. "I expect the momentum to continue," he added. And with the presidential polls behind them, enterprises in the US will now start modernizing IT and unleash their discretionary spends. "They will now commit on the spends they had planned for," he said.
In November, the US administration released new health insurance rules aimed at ending discrimination against the sick. Healthcare and insurance pose huge opportunities for Indian IT companies, Roy said, adding banking and government deals to the mix. In Europe, banking should pick up due to the cost pressures, he said.
Over the past few years, Indian IT companies have been trying to reduce their dependence on Europe. But, Europe and Japan today are underpenetrated, and most Indian IT firms are now focusing on these two markets. Infosys, for instance, acquired Lodestone of Switzerland.
Viswanathan said: "In terms of offshoring, the pendulum is shifting toward Europe and the offshoring story is certainly growing."
Purushothaman noted that Japan, too, is becoming a hot destination. For instance, HCL recently signed a deal to provide SAP products to D+M Group in Japan.
In the coming quarters, outsourcing deals in segments such as engineering R&D, automotive, consumer electronics, and computer peripherals should see a lot of growth. "Verticals like infrastructure management services, virtualization, analytics, healthcare, and BFSI should see more growth," Viswanathan added.
According to Purushothaman, telecom, financial services, and healthcare will do better. Mobile payments, cloud computing and big data will see good growth, he added.
This year, though, will be all about margins, which will continue to be under pressure, Purushothaman noted.
Concurred Viswanathan: "Operational costs are on the rise and companies are demanding highly skilled workforce, which comes at a steep price." Moreover, in Europe, companies want staff onsite and this puts additional cost pressures on Indian IT companies, he added.
Swati Prasad is a freelance IT writer based in India.