Growth of Wipro, Infosys, HCL and other desi software majors hit

An analysis of top large and mid-size Indian IT companies show that the sector’s revenue growth has slowed substantially over the past half decade 
Growth of Wipro, Infosys, HCL and other desi software majors hit

India’s IT services sector appears to be far from taking another victory lap. Both large and mid-size companies, which witnessed a stupenduous two-fold growth between FY10 and FY15, registered lesser growth in the subsequent five years between FY15 and FY19. Disappointingly, fewer companies such as Mindtree and L&T Infotech catapulted into the $1-billion club in the past five years, lower than what was seen a decade ago when already billion dollar entities like TCS and Infosys more than doubled their income effortlessly.

An analysis of ten companies — comprising five large and five mid-size firms — indicates that India’s IT firms aren’t in a sweet spot, with some in the mid-rung struggling due to indirection. Complicating their woes, the recent downturn in the global IT industry, led by the US and European regions, have further marred Indian IT firms’ chances of achieving the unprecedented growth seen a decade ago. Needless to say, the troika — TCS, Infosys and Wipro — cumulatively account for over 70 per cent of total sales of the Indian IT-software industry even today. 

“Basically, there are a lot of supply side pressures on the overall IT sector. But, there’s more pressure on tier-II companies than tier-I companies as the former are focused largely on the US geography, which is currently seeing several supply-side issues. As such, mid-size companies are seeing severe pressure on the margins,” said Aniket Pande, Research Analyst, Prabhudas Lilladher. 

Besides this, digital deal sizes have become bigger, and often companies prefer service providers that can stitch two or three deals together. “Large companies are getting more traction. It means that the going is getting tougher for mid-size companies,” Pande added. 

Citing the case of Hexaware Technologies, which announced a margin guidance of 7.5 per cent on Thursday, Pande said that given the deal pipeline and market momentum, these margins appear to be stretched. 

While trade body Nasscom has refrained from giving forward-looking annual guidance, it is estimated that the $181-billion IT & ITES sector — long considered a sunrise industry — is expected to grow at a slim 7-9 per cent in FY20. 

Given the benefit of size, even if Big IT — TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra — continue to rake in 9-10 per cent annual growth, that’s reason enough for investors to cheer. But, the growth party could be ruined by the performance of the mid-rung. 

For instance, while companies like Mindtree, Hexaware, Zensar, L&T Infotech and Persistent Systems all clocked more than two-fold growth in revenue between FY09 and FY14, this high-wattage increase hasn’t been replicated in the following five years. 

Even for the top five firms, which saw a 2-3-fold increase in their income during FY09 and FY15, the subsequent five years have seen reduced growth. However, it’s pertinent to note that the top five were already in the $1-billion bracket by FY09 and FY10 but still managed to pack a punch in the subsequent half-decade. 

Put another way, the high-spirits growth for larger went on for nearly a decade, and in some cases, more than a decade unlike the tier-II companies. 

One could reason that the vibrant market momentum added to the large firms’ zing, but our next best were unlucky since the favourable factors no longer existed when they began gaining ground. Several firms with niche offerings such as product development firm AztecSoft, software testing services firm AppLabs, and offshore enterprise applications and outsourced product developer Sierra Atlantic merged with either domestic or international firms when they could no longer survive on their own. 

What’s worse is that choppy waters are still around and could spark trouble for the country’s IT firms. 
According to Naveen Kulkarni, Head of Research, Reliance Securities, for mid-size entities like Hexaware, a key negative is the softness in the BFSI vertical, mainly in capital markets. Besides this, the lengthening sales cycles in the BFSI segment could prove challenging. A weakening BFSI vertical sounds like a deathknell for Indian IT, as it is the largest segment accounting for over 25-30 per cent of total deals. 

However, despite headwinds, India continues to be the world’s leading sourcing destination, accounting for approximately 55 per cent market share. Together, Indian IT firms have set up over 1,000 global delivery centres in about 80 countries. 

While there has been a sharp fall in traditional offerings such as software development and maintenance, growth in digital technology services has not been adequate to offset this yet. The big-five have now diversified their offerings to blockchain and artificial intelligence and tier-II companies appear to have adopted focused strategies to win more digital deals, but much more needs to be done on the differentiated offerings front. 

If the sector continues the single-digit growth pace, it could risk missing its FY25 target of achieving a size of $350 billion.

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