India’s export-oriented information technology outsourcing industry is perhaps more optimistic today about growth prospects than it was in the past five years.
The reason: Green shoots in its key market, the US, and better-than-expected performance in the recent quarters on the back of a weakening rupee.
But does it mean that the bad days are over? Not many industry insiders believe so.
They feel it may take years before the industry regains the pre-2008 business health, or perhaps it may never get back to those days that saw unbridled growth.
They have reasons to believe so. While there is certainly an uptick in demand from the US, which accounts for 60 per cent of India’s IT outsourcing businesses’ demand, the relatively less harnessed regions in Europe are yet to come out of the economic uncertainties.
Besides, Indian domestic market has shown signs of fatigue and weakness.
“Up to 2008, almost all geographies were doing well, may it be Europe, the US, Australia or even India.
“But if you look at the situation today, Europe is in trouble; India is not doing well, but the US has picked up.
So, if 60 per cent of the market is doing well, then there is some optimism, but you can’t compare this with the pre-2008 situation,” said Girish Paranjpe, an industry veteran and the former joint chief executive of Wipro’s IT business.
While most Indian IT services companies have registered decent growth in key geographies and have hinted of having a strong pipeline, the depreciating rupee has also benefitted them to deliver strong numbers, say analysts.
“Indian IT companies reported very good growth in the Q2 (April-June).
“While this certainly reflects the underlying strength in the market, it was also partly driven by the depreciating rupee,” said Sid Pai, president of Asia-Pacific region, Information Services Group.
“Depreciating pupee, however, will have its own sets of challenges.
“Clients will always expect the vendors to give them some discounts.
It will also impact their international expansion plans as the cost of acquiring talent and companies outside India will grow.”
The Indian currency has depreciated over 13 per cent against the dollar since January this year.
While the depreciating rupee has benefitted the Indian IT services sector, the weakness in the Indian economy is expected to have incremental impact on the industry in the days to come, says V Balakrishnan, director at Infosys, who also heads the business process outsourcing unit, Finacle & India Business, at the company.
He says it may also affect the cost structure of the companies as inflation continues to remain high.
“For the IT industry, per se, the impact (of the slowdown) may not be that much because the contribution from the domestic market is still low for the overall industry.
“But with the elections coming in, any new large projects will not get announced or sanctioned.
“So, that means the incremental growth could get impacted,” added Balakrishnan. Indian IT services companies derive between 2 and 10 per cent of their revenues from the domestic market.
Tata Consultancy Services, India’s largest IT services company, gets around $1 billion in revenue from India.
According to Paranjpe, when the Indian economy was on a growth phase, it was also responsible for driving many of the opportunities for the industry players in the country.
“That India story has somewhat less compelling now for whatever reason. So, to that extent, it has some collateral impact on the Indian IT sector.”
However, despite the weakness in the Indian economy, the IT outsourcing services industry is perhaps the only sector that promised a growth of between 10 and 15 per cent in FY14, whereas most other sectors are bracing for zero to five per cent growth.
While the performance of the top tier companies such as TCS, Infosys and HCL Technologies has been ahead of the estimates, the growth guidance they have given is quite encouraging.
“The state of the Indian IT industry is actually pretty strong; the pipelines are good and there are important green shoots in key geographies,” said Pai of ISG.
However, the industry is not completely out of the wood. They need to get back the pricing power and they need to come to a stage when the demand-supply situation is fully balanced out, he added.
According to Vineet Nayar, non-executive vice-chairman of HCL Techologies, the industry is also required to understand the changing realities of the marketplace where everything from product to service has to be cheaper than it was before.
"The relevant question today is that the architecture of the industry has dramatically changed -- what are you going to do to transform your business model and your company so that you can be more relevant.
“So, companies doing something about it, voicing it, thinking about it, will find unlimited growth opportunities".