Reality check

The September quarter results of domestic IT companies show that the sector’s problems are worsening and can dent profitability further in the coming quarters, unless remedial action is taken. It is not as if the situation has turned dire in a single quarter; trouble has been brewing for over a year, but it is only now that the CEOs have become realistic in their outlook. The recent quarter was one of the worst periods in recent times for these companies. Revenue growth in constant currency terms was in single digits for most of them. While Infosys recorded a revenue growth of 8.9 per cent over last year, TCS and Wipro recorded about 7 per cent growth. This is a steep drop from the 10-12 per cent growth in the June quarter. Infosys has cut its revenue guidance for the full year 2016-17 to 8-9 per cent, down from the 11.5-13.5 per cent in the beginning of the year. Cognizant Technology Solutions too lowered its guidance for the full year 2016 to 8.5-9.5 per cent, a marked drop from the 20.9 per cent growth recorded in 2015. The big US banks are outsourcing less work.

The reasons behind the slowdown are obvious. The weakness in banking and financial services segment that accounts for 25-40 per cent of the revenue, has hit the Indian IT sector hard. The low interest rate regime is eroding the margins for banks, making them cut discretionary IT spends. Further, increasing competition for legacy business — application development and maintenance — and cannibalisation of traditional services due to automation technology is also adding to the pressure on overall growth. Price wars in the industry have made margins ebb and profitability decline.

There are a few ways by which the sector can tackle these issues. One is to grow revenue through the inorganic route. Niche companies in the global market which have product and process skills in new age disruptive technologies can be a catalyst driving growth for Indian IT companies. Wipro’s recent acquisition of Appirio, a leader in cloud applications, is a good example. Until now only companies such as IBM and Accenture had a presence in the SaaS (software as a service) market. Now Wipro will have access to the salesforce and workday services market through Appirio’s skilled workforce. Though Indian companies do not have a good track record in global acquisitions, continued effort to acquire companies and integrating them fruitfully will help. The faster Indian companies adapt to the changing requirements of the global IT services market, the better. Margin pressure may continue because of the problem of oversupply of service providers, but if companies strive to differentiate by building intellectual property and high-margin platforms, they can draw benefits. Also, automation of high-end functions can help in non-linear revenue growth and enable companies save substantially on manpower costs.

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