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Tale of two IT majors

The June quarter performance of Infosys and TCS (Tata Consultancy Services), India’s two heavyweight software companies, highlights both the changes sweeping the IT sector and the challenges facing it at home and abroad. The most telling takeaway of the week is that Infosys is no longer a proxy for the entire software sector of the country; the baton of bellwether seems to have passed to the TCS.

A comparison of the quarterly performance of the IT majors is a study in contrast. Infosys faltered, TCS moved ahead resolutely. Infosys disappointed, TCS surpassed expectations.

What shocked the market was that Infosys downgraded its sales outlook citing worries that clients will reduce spending on outsourcing services due to global economic uncertainty. India’s No.2 software services exporter now sees its revenue in dollar terms rising five per cent to $7.34 billion in current fiscal, down from its April estimate of 8-10 per cent growth and lower than 11-13 per cent growth expected by the industry body Nasscom. Infosys declined to predict its earnings for the next quarter, discontinuing a very old practice that the markets had become comfortable with.

In contrast, TCS came with impressive numbers for the top and the bottom line, backed by a confident outlook. The country’s largest software firm reported a 37.39 per cent jump in consolidated net profit to and 37.71 per cent jump in revenues. TCS said it saw strong, secular growth across all its service lines and industry segments driven by robust volumes from key markets like North America, Europe and UK and, more importantly, expected this to continue.

Some challenges, however, are common to all the firms in the industry. India’s $100-billion IT and BPO sector earns about three-quarters of its revenues from customers in the United States and Europe. Infosys, Tata Consultancy and Wipro have benefited from an increase in demand for outsourcing to cut costs and boost efficiency.

However, the monetary crisis and economic slowdown in eurozone and the sluggish recovery in the US have limited the growth opportunities in these markets. The political opposition to outsourcing is also making its impact. Customers are deferring decisions on spends and some like General Motors are even cutting technology outsourcing. This will not help any of the Indian firms. If the trend continues, this year could end up as one of the worst ever years in Indian IT industry in terms of revenue growth.

At the same time, competition is becoming fiercer by the day. A big revenue earning vertical banking, financial services and insurance (BFSI) has become commoditised: almost any IT vendor can do what anyone else does, and some can do it cheaper. There are many more Tier-1 players now compared to 3-4 years back, vying for a larger share of the volumes. This mismatch between diminished growth potential and higher growth aspirations of existing players is leading to aggressive pricing.

There has been a collective failure in expanding addressable markets beyond traditionally strong areas. The inability of the industry to drive business in emerging markets like Latin America and Africa has been a major stumbling block. In recent years, Infosys and TCS have talked about doing more complex, specialised work customised for particular clients. Here, they face formidable rivals like Accenture, IBM and Sapient, which dominate the IT consulting market.

So, there are many aspects that need to go well for the industry to regain lost glory. Clearly, Indian IT companies will have to keep adapting their business models to maintain growth momentum. How quickly and successfully to do so is the real test of their managements.

Views expressed by the author are his own and do not reflect the newspaper’s policy