With the year ending, eWorld did some stock-taking, to find that the top IT firms no longer appear to lead in every vertical they service. Are the smaller rivals catching up?.
K Bharat Kumar
In the past 18 months, companies across industries have been through a test of fire. Especially IT companies, which have traditionally depended on the now most troubled markets - North America and the Banking sector - for most of their revenues. In September 2008, Lehman Brothers collapsed and then the economic world around us quaked. Since then, hope has plumbed depths before optimism returned some cheer to the markets in the late part of this calendar.
How have IT bellwethers navigated this downturn? Did some of them do things differently that helped them stay afloat better than the rest? Did the pecking order change at all?
Verticals - core vs emergingeWorld took the verticals (ie, industry segments by which IT companies classify clients) that contribute significantly to the industry's revenues. Banking, Financial Services and Insurance (BFSI), BFSI,Manufacturing and Telecom have traditionally been the core verticals for the IT industry. In the recent past, newer verticals such as Healthcare and Life Sciences, Retail, Transportation, Energy & Utilities and Media & Entertainment have emerged.
In the current downturn, BFSI and Telecom have been the worst hit, while Manufacturing has been sluggish for a long while now. With the sub-prime mortgage crisis showing up as early as August 2007, did IT companies use the opportunity to squeeze more out of emerging verticals and create a sustainable presence there?
The verdict is still out on that, but what is obvious is that the leadership that the top 3, namely TCS, Infosys and Wipro might have commanded, say, eight years ago, across all verticals, no longer holds.
The Changing DynamicsLogically, if companies broaden the scope of their offerings for the emerging verticals, and increasingly higher revenues come from these verticals, then these companies stand a better chance of navigating the next downturn. Add to this, companies' ability to understand the changing nature of businesses they service - after all, investment banking is never going to be same again after Lehman Brothers. Also, verticals such as Media are increasingly more open to the global development model.
The nature of deals from clients is also changing. For instance, more and more clients give out unbundled orders as a result of which large deals are no more the norm. (Accenture, in its recent analyst call said that large deals - of the size of $ 1 one billion - are not common and that it sees a trend in unbundled deals.)
Geographic supremacy is also coming under question. Europe is no more the poor pretender to the throne that North America occupies. A recent TPI report states that for the first time, North America looks set to lose its number one position in outsourcing spends, to Europe. TPI's data from the three quarters ending September 2009 shows that the Forbes Global 2000 list of companies saw outsourcing spends from Europe outnumber North American outsourcing figures by $ 1.2 billion in annualised contract value.
Industry watchers point out that the Asia-Pacific region is as challenging as Europe, in terms of diversity of cultures that typically influence decision-making. In other words, if you crack the Europe walnut, chances are high you would do the same with A-Pac.
Whither, the leader?The table that ranks Indian IT companies in the segments they service shows that TCS, the overall leader, tops in revenues from BFSI and Manufacturing, Retail and Transportation. Wipro is a far-ahead leader in Energy & Utilities while Cognizant races ahead of the others in the Healthcare and Life Sciences vertical.
Interestingly, Infosys is placed second in three out of the five verticals discussed and third in Telecom. Not only that, a player that has never figured in the overall top five, Tech Mahindra now ranks first in Telecom.
Wipro brings up place three in Manufacturing, Retail and Transportation (we clubbed these for the sake of brevity). It started out much later than rivals in gaining visibility in the BFSI vertical and is placed fourth there as well as in the Telecom vertical.
Here, it may be noted that Cognizant's Healthcare and Life Sciences revenues includes those from Health Insurance companies. If that were to be taken out and added to the BFSI vertical, as Infosys does, then there is no saying what would happen to the ranking in the healthcare vertical. On the other hand, if that happens, Cognizant may well overtake Infosys in BFSI revenues.
(It is true that the reader could do with more uniformity in the way IT companies disclose revenues from segments they service. For example, one company does not disclose revenues from its healthcare vertical, while another does not elaborate on telecom; one clubs revenues from health insurance companies under BFSI, while another has it under Healthcare. But, for some analysis to be possible, any data, however approximate, was welcome.)
Analyst takeGiven the changing dynamics of the business, is it not a cause for concern for the Top three IT companies that the next two, namely Cognizant and HCL Tech, are playing catch-up? Obviously, showing bigger growth on a smaller base is easier. But incremental revenues added by these two players (in each of the last four quarters) far exceed those of the top three in several respects. (See graphs.)
Neither Infosys not TCS responded to queries, but the analyst world seems to think nothing of it. Sudin Apte, Principal Analyst, Forrester Research, says, "These is no cause for concern if none of the top companies do not have the leadership position in each vertical they play in." Overall revenues matter most to him. Cognizant and HCL Tech, he says, have a long way to go before they catch up, "though their growth and ability to get orders in such an environment are commendable."
Agrees Viju George, VP, Research at Edelweiss Research, saying, "I would not be concerned for the top three, just because the next two are showing better incremental revenues." First, he says, the industry will be returning to healthy growth in the near future. Infosys, TCS and Wipro should soon see sequential of growth of 4-5 per cent once the times get better, according to him.
Second, he says, what is important is not whether a biggie has lost out to a smaller rival in a single vertical. "If it can make up for loss of market share in one vertical with a gain in another vertical, then things are fine."
The flip side to this is, a company's performance in its core markets should be intact, before it seeks newer horizons. If new territory comes at the cost of traditional business, then, when the economic turnaround comes, companies could be working twice as hard to get back to where they were even in their core businesses.
George adds, "Each company has a different strategy. Cognizant's philosophy is to reinvest into the business anything it makes in excess of the 19-20 per cent operating profit margin. Other companies, (before the slowdown) had better margins."
HCL Technologies has been particularly visible in the number, and the size, of deals it has won in the recent past, especially in areas such as Media & Entertainment (News Corp) and Healthcare (Fortis). Cognizant's activity among emerging verticals includes deal wins in utilities (Elexon), e-commerce (mJunction) and in the transportation space (Invensys Rail).
Incidentally, even as you read this, there may be churn among the top three, themselves. Edelweiss' research report in early November raised the issue of TCS and Wipro pulling ahead of Infosys. Its ability to garner emerging market growth share, fight multi-vendor situations, keep at sales and marketing investments and the ability of its BPO, infrastructure management and systems integration arms to fire consistently, together would decide how Infosys performs against its peers, the report cautioned.
The specificsIn the BFSI segment, several companies saw at least two quarters (out of the last four) where revenues slumped from the sequentially previous quarter.
HCL Technologies, although placed 5th in the overall ranking in BFSI, had good incremental growth in the last two quarters. The company says its focus on the top 10 in terms of relationship building helped. The Asia-Pacific region was another contributor to revenues. Says Suresh Sundaram, Global Head for Marketing and Strategy, HCL Technologies, "APAC registered 50 per cent YoY growth and 11 of our 18 new strategic clients were added in the APAC."
In Healthcare, where Cognizant is the clear leader, most players showed incremental growth every quarter, save for Wipro. Among other clients, Cognizant works with Sanofi Pasteur in clinical trial data management. Sanofi is a player in the human vaccines space including in H1N1. Significantly, says R Chandrasekaran, President and MD-Global Delivery, Cognizant, "We helped Sanofi meet deadlines in five critical H1N1 studies."
With healthcare a seemingly green pasture, Wipro says it is investing to gain growth here. According to Wipro Technologies' CFO, Manish Dugar, "We have carved our Healthcare & Services as a separate vertical and invested in a high profile team - this is a key growth area in time to comeWe are already seeing significant traction in deal wins as well as order book in this space, Healthcare reform in the US creates a significant market opportunity."
HCL is also upbeat salivating at the opportunity here. Says Sundaram, "We work with eith 10 of the top 15 pharma companies and seven 7 of the top 10 medical devices companies." It recently inked a five-year outsourcing deal with Fortis.
Manufacturing, Retail and Transportation saw mixed trends in sequentially incremental revenues. However, Wipro's Dugar says, "Retail has been significant with deal wins we had in the September 2009 quarter. (Our) strong pipeline should help us continue to grow in this space and offset any challenges in Transportation. In Manufacturing, we have seen very strong growth in Europe., where our investments have paid off."
HCL, with a focus on the focus on the `consumer', has clubbed together verticals such as Media & Entertainment, Retail and Telecom, all of which service the end-user, where HCL has shown strong growth in recent quarters.
In Telecom, Dugar of Wipro feels that though technology and telecom have shown sequential decline the last quarter, "they seem to be bottoming out." Unplanned ramp-downs and price discount discussions are over, he says. "We are starting to see more spend on product development. We are also seeing a lot more traction on the IT side in these areas. We expect flat to positive sequential growth, but no significant uptick yet." Tech Mahindra tops the charts here.
GeographiesNorth America, the epicentre of the economic earthquake, was expected to trouble the IT industry. While the March and June 2009 quarters were a mixed bag, all the players returned to incremental revenues in September, with Cognizant and TCS seeing the biggest jumps in the September 2009 quarter. Taking the last four quarters together, Cognizant saw the biggest incremental revenues, from the September 2008 standpoint. It also pushed into the third spot, replacing Wipro in the June 2009 quarter. MrChandrasekaran of Cognizant says, points out the significance of the company's performance saying, "In the last twelve months ending September 2009, the growth numbers for Cognizant are purely organic, driven by growth across industries." It may be recalled that TCS and Wipro acquired the assets of Citigroup's back office arm and the infrastructure arm, respectively. HCL's figures include Axon Consulting that it acquired during the course year.
While Cognizant has made other acquisitions in the past, the most recent being UBS' back office assets in India, none has contributed more than 1.5 per cent to its revenues, sources say. TCS and Infosys saw the biggest hits during the last four quarters from European (quarterly incremental) revenues, possibly due to the plummeting contribution of the UK's British Telecom to their revenues. ., as well as the volatile nature of the Pound-Dollar and Euro-Dollar relationships. HCL Tech, though ranked fourth in the European table, saw sequential revenue growth here in the last three quarters.
Cognizant, though bringing up the overall rear in the European chart, saw the highest incremental revenue in the September 2009 quarter. According to Mr Chandrasekaran, in the last eight quarters, European revenue contribution has grown from `mid teens to about 20 per cent of overall revenues, with Continental Europe contributing as much as about 43 per cent of European revenues.'
HCL too sees growth opportunities in Europe in the area of engineering services, with clients evolving from local outsourcing to offshoring. "With the Europe macro-market turning around, HCL has seen a recovery in enquiries and activities in the Engineering space led by Germany," says Sundaram.