The country’s top IT companies have, in fact, revised revenue guidance for the financial year, citing the buoyant demand environment. The software services exporters say they will end the year with double-digit growth rates, and a three-year high demand forecast.
Pushed into digital transformation due to the pandemic, clients, too, have opened up their wallets to allow these IT firms to work on newer go-to-market strategies. Industry body Nasscom has said that the operating margins of Indian IT firms expanded to a seven-year high of 25% on average in the previous fiscal, on the back of cost savings from reduced travel by employees, a favourable onshore-offshore mix — due to a cutback in onsite roles — and lower attrition levels.
The way forward will not be without some bottlenecks though.The growing demand for IT services, a massive talent crunch, the drying up of mega deals, a gradual reopening of travel and work from offices — all of these pose challenges in sustaining their upward trajectory going forward.
Share of Global Pie
The tough deal landscape over the past decade has not deterred Indian IT firms from charting double-digit growth rates. This has primarily been due to an increase in the onsite and near-shoring presence, competitive pricing, quality learning and development initiatives. These firms have stayed on target despite the pandemic, netting a healthy deal pipeline and bagging major contracts from multinational companies that have undertaken digital transformation projects.
“We are participating more and more in areas which relate to digital transformation, which relate to cloud work, which relate to data and analytics work,” said Salil Parekh, CEO of , during the company’s second quarter earnings call. “We see this across all industries, and we see that large enterprises are accelerating their spending.”
(TCS) has also said that its digital solutions have helped win more clients since the onset of the pandemic. “We continue to gain market share, benefiting from the flight to quality that we have seen over the last 18 months, as well as in structured vendor consolidation exercises,” TCS CFO Samir Seksaria said during its recent results announcement.
Says DD Mishra, senior director at Gartner: Global IT services end-user spending will touch $1.2 trillion by the end of the year, of which the share of Indian IT companies is expected to be about 20%.
“Even in the years prior to the pandemic, the $70 billion Indian outsourcing market had started winning a share of deals against the likes of IBM, DXC and Cognizant in addition to winning European markets,” said Amit Chandra, assistant vice president at brokerage HDFC Securities. “From a historical average of 60% incremental market share that was coming to Indian IT services, it had increased to 80% in the last five years.”
According to data from the brokerage firm, the revenue market share (RMS) of India-based IT companies doubled from 14% to 28% through financial years 2011 and 2021, to touch $59.3 billion.
During this period, the RMS of global peers Accenture, IBM, DXC, Atos, Capgemini and Cognizant shrunk from 86% to 72%, the data showed.
“Clients had high dependency and legacy engagements with these global companies, so when it came to new solutions like 5G, automation, cognitive solutions, engineering and cloud, Indian companies happened to be in the right place with their investments and acquisitions in this space over the years prior to the pandemic,” said Mrinal Rai, principal analyst at research advisory ISG. Unlike multinationals that have more employees in their home markets, Indian IT firms could deliver from global offshored locations smoothly even during the pandemic, Rai added.
Be that as it may, since the entire global IT spending pie is growing post-pandemic, the incremental market share of Indian IT will go down to 50% and that of global peers will also stabilise, providing enough space for everyone to expand.
About three to four years back, TCS started to win mega deals (valued at over $1 billion), heralding the “coming of age” of Indian IT. These became the new metric for evaluating growth opportunities in the sector and were soon replicated by peers.
However, such kind of deals have been elusive of late. TCS CEO Rajesh Gopinathan, talking about the increased frequency of moderate-sized deals during the company’s recent earnings call, said it was “a very heterogeneous mix of large, mid-sized and small deals (in Q2).” “When you compare this against last year’s number, after removing one very large mega deal that we reported in Q2 of last year, this represents a 25% expansion on like-to-like TCV (total contract value),” he said.
Parekh of Infosys agreed — during the company’s earnings presentation — that it had become difficult to predict the trajectory of mega deals. Analysts say mega deals are still around but given the robust deal environment overall, they have become less relevant now.
“The market is more focused on talent shortage than large deals at this time,” said Peter Bendor-Samuel, CEO of analyst and advisory firm Everest Group. The average TCV of managed services deals in 2015 was around $66 million. It is down to $50 million now, according to ISG’s 3Q21 Global Index report.
Contracts are getting shorter. From an average contract duration of 3.5 years in 2015, it has fallen to around three years now, which in turn impacts deal TCVs. But the silver lining is that there are more contracts now, with a record 564 being awarded across managed services in the July-September quarter globally.
According to Chandra of HDFC Securities, a mega deal improves margins by 3-4% for IT companies, so even fewer deals with higher frequency put companies in a comfortable position.
Despite some hits and misses on the way, the performance of Indian IT companies overall has been good, said Phil Fersht, chief executive of Hfs Research. “Infosys has benefitted from stable leadership and strong execution.
has finally arrived at a rich spell of long overdue growth due to re-energized leadership, greater focus on local sales and delivery and simplification of its management structure,” he said.
Wipro CEO Thierry Delaporte told ET recently that the Bengaluru-based company had changed 30% of the top leaders in the organisation. He also said the IT services provider was moving the leadership closer to clients. “HCL’s performance has been underwhelming throughout the pandemic due to a lot of consolidation of its hyper growth in the years leading up to Covid-19 and its focus on heavy execution,” Fersht added.
HCL recently launched a dedicated Cisco Ecosystem Unit to offer Edge competency solutions and partnered with SAP AG to offer consumer-focused cloud solutions during the July-September quarter. With travel and work from office resuming, industry watchers have cautioned that IT clients are reverting to their “planned” spending patterns, and that this would spell margin pressure for service providers. But this may be somewhat offset by the mergers and acquisitions undertaken by Indian IT providers to build on their digital consultancy expertise, with clients seeking both kinds of services from the same vendor.
An exposure to technology that supports remote working securely has opened up opportunities for clients to think about a fresh operating model and newer ways of working with IT companies. Over the past year, the share of offshoring has gone up significantly for Indian companies.
“This is going to be a hybrid operating model, and we’re going to have the best of both worlds, flexibility and comfort of working from home to the extent possible, and the benefits of meeting in-person, collaborating and learning and doing certain critical tasks within our office premises,” HCL CEO C Vijayakumar told ET.
The extended work-from-home arrangement has made the industry hopeful about long-term gains from offshoring. While travel will be back, albeit cautiously, hybrid delivery models will stay since it has not impacted delivery quality so far, Rai of ISG said.
said it had increased its offshore mix by 300 basis points over the past 5-6 quarters and expects to continue improving this metric.
Leading Indian IT services companies are therefore hiring a larger number of freshers and even nonengineers. India is by far the most critical global region for delivering people scale and investing in solidifying the model is crucial now, analysts say, even as they sound sceptical about how far the intake of freshers can rebalance the supply side crunch brought on by a lack of on-ground experienced delivery associates.
“In terms of talent availability, in terms of scale and quantity, I don’t think any other country can match India,” said UB Pravin Rao, COO, Infosys, referring to its plans to increase hiring and upskilling recently.
Ready to Win
Indian IT services providers have taken several initiatives to enhance their capabilities to compete with global peers, according to enterprise research firm IDC. Over the years, Indian IT majors have built multiple ecosystems in partnership with companies like Microsoft, AWS and Google (GCP), which are helping them offer the technology solutions of these companies as well as resources skilled in managing them.
To address the increased demand for cloud adoption, Indian IT companies are setting up dedicated business units by partnering with cloud hyperscalers, said Harish Krishnakumar,senior market analyst, IDC India. Like global service providers, the Indian IT firms have also undergone changes in their operating models to enhance focus on emerging geographies, including the home market.
“Unlike North America and Europe, India is considered an emerging market, and after the pandemic, most Indian enterprises have started to prioritize digital transformation initiatives,” Krishnakumar said. “Indian IT service providers are also very well poised to cater to the needs of the local market as they understand its pulse better.”
For one, TCS’ India revenue grew 20% during the second quarter, the highest among all its geographies. Among the top five IT services companies in India, HCL’s “go-to-market strategy is well supported by our delivery strategy, led by the establishment of New Vistas (delivery centre) globally”, Vijayakumar has said.
Tech Mahindra CEO CP Gurnani told ET that it would also hike its talent base globally. “We will step up our base in Latin America to increase the talent supply… we are focusing on South America, and have development centres in Chile, Argentina, Colombia and Brazil,” Gurnani said.
The question is whether Indian IT is ready to expand its market share to 50% from the current 20% of global IT spending. Mishra of Gartner does not think so. “50% is wishful thinking… it will take years for it to be reality…,” he said.