The trend in the quarterly earnings of Indian IT companies indicates that the sector is at an inflection point. Unless the companies shed their conservative attitude and upgrade their offerings, their businesses could shrink in the coming years. For the first time since the euro trouble in 2011, all the top IT companies — TCS, Infosys, Wipro and HCL Technologies — have reported a decline in sequential revenues, the weakness felt in almost all segments. In dollar terms, the revenues of Infosys and Wipro grew a paltry 5.8 per cent and 7 per cent respectively. The growth has been lower by 3-4 percentage points for most technology companies compared to the last fiscal. This does not bode well for the future as two successively weak quarters implies that the earnings growth is likely to be feeble in FY16 too.

The defensive tone adopted by CEOs at the end of the March quarter is a reflection of the myriad problems plaguing the sector. A weak euro has hurt realisations, but this is only part of the story. Increased commoditisation of traditional application services is severely eroding the pricing power of these companies. Many of the important segments of IT companies such as telecom and energy have shown insignificant growth due to sector-specific problems; telecom companies are grappling with the additional cost of capacity upgradation and energy companies have been severely hit by declining crude oil prices. The share of revenue from newer technologies, that hold greater potential for fast growth, remains very low.

To return to the growth recorded in the heydays, IT companies need to move beyond legacy application services offerings and attempt to take part in the ‘digital transformation’ that is taking place globally through social media, analytics and cloud-related projects. Global majors such as Accenture and IBM are taking giant strides in this field. The former already earns a revenue of $6 billion from it. But this segment is still not big enough to get reported as a separate item in the financial accounts of the major Indian players. One way to acquire the required skill in the newer technologies is through acquisitions. But unlike global IT majors, Indian players are reluctant to carry out large acquisitions despite sitting on huge cash piles; Infosys, TCS and Wipro currently hold $3-5 billion in cash. The obsession that top-tier IT players have with margins too has to reduce. While Accenture, Cap Gemini and Cognizant operate at a 13-17 per cent operating margin, Indian vendors enjoy a 21-27 per cent margin. This fixation has resulted in loss of projects for some. The focus of the industry currently appears to be on improving productivity by bettering utilisation rates and deploying artificial intelligence and other technologies to automate low-end tasks. While improving earnings through cost reduction can help in the short-term, the industry will have to seriously rethink its long-term strategy to remain successful in business.

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