India IT-BPO Industry 2012 – Contradictory Growth forecasts by Top Indian Players

Indian Outsourcing Industry (ITO/BPO) top players include TCS, Infosys, Wipro & HCL technologies and these players gave contradicting growth forecasts for their companies wherein Tata Consultancy Services (TCS) and HCL Technologies, announced good growth in earnings for the quarter ended June 2012 and despite the challenging macro environment gave good growth forecasts for the year 2012 while Infosys and Wipro, announced not so great earnings for the quarter ended June and not so great growth forecasts for the year as both the companies are still struggling with internal restructuring and Infosys seeing budget cuts by their Clients. Both Wipro & Infosys have seen major changes in the Leadership where in new CEOs took over and also saw significant changes in the internal organization structures and they are struggling to adapt to changing business environment. The global economic slowdown is a matter of concern for the IT industry, fall in volume growth and pricing, shortening of contracts and slow decision-making, geopolitics (since it is election year there are visa hurdles) and currency arbitrage particularly weakness in rupee are major concerns for the Indian Outsourcing industry.

TCS has been doing well since past three years post the 2008 subprime mortgage crisis and has been able to sustain double digit growth in sales and profit in the changed outsourcing demand. The growth has been good across the verticals and across geographies not limited to few specific verticals and geographies and has benefited the most by the upsurge in outsourcing demand in the past three years. For the quarter ended June 2012, TCS reported volume growth of 5.3% and it saw growth across markets, industries and service lines. The reason for such good performance by TCS is because the company identified and invested in various non-linear opportunities such as software products, platform based BPO offerings and Cloud offerings like software as a service (SaaS), and focus on unit-priced contracts for the past few years. Also TCS has scale in terms of presence in major geographies, skills, capability and focuses towards creating intellectual property. TCS is also looking at inorganic growth wherein it is looking at a deal size of USD 50 million to USD 500 million if the target is a strategic fit particularly looking at inorganic growth to strengthen its European presence.

Infosys earnings for the quarter ended June 2012 were disappointing and the company did not give guidance for September 2012 quarter and cut its guidance for 2012-13 to 5% which is far below the NASSCOM ’s forecast of 11-14% growth for FY13. Infosys is still struggling with internal leadership and organizational changes as it had a new CEO and Chairman and is facing difficulties with its business model adaption to the new demand environment as there is a continuous commoditization of traditional IT services (Application Development & Maintenance) and it is finding it difficult to maintain premium pricing during contract renewals. Major part of Infosys business is from discretionary IT projects and it is looking to migrate large part of its business into non-discretionary since couple of years and looking to utilize discretionary resources to focus on growth of consulting and systems integration (33 % business comes from CSI) and products, platform and solutions (PPS) business. Infosys’s product efforts are centered on Finacle which is core banking solution, and other platform-based services for the likes of Airtel Money. Infosys built a US$ 2 Billion Packaged implementation business   and also focusing to create an IP-based and non-linear revenues. Infosys is looking at both organic and inorganic routes for growth and has a healthy cash pile which can be used for acquisitions that helps to penetrate new markets, create new markets and acquire intellectual property.

Wipro too had a new CEO coming in 2011 but is still struggling with internal reorganization issues and announced a 1.4% QoQ dip in dollar revenue following a decline in most of its businesses (BFSI fell 2% & Retail & Transportation fell 4%) and geographies for the quarter ended June 2012 and  guidance for the quarter ending September 2012 is also disappointing. Despite the acquisition of several companies fore inorganic growth in the last decade to strengthen its business verticals, which Wipro calls the "string of pearls" strategy, the company has not been able to overtake its peers both in terms of revenue and profit growth. But CEO TK Kurien is confident about Wipro recovering as it had done well in terms of adding clients and its strategy comprises of three phases which is growing the existing client base to continue to get short-term sustainable revenue, invest and broaden its customer base and make sure they do not get caught up in the changes and swings of their client business and prepare to face adversities. Wipro believes it is doing well with the first phase and expects the second phase to take another 8 to 12 months and the third would be a year-round story.

With strong QoQ growth across verticals (infrastructure management services (9.2%), enterprise applications services (4.8%) and engineering and R&D services (3.9%)), HCL Technologies posted better-than-expected results. But HCL Technologies is still struggling with its BPO business as it continues to be sluggish with a 2% fall in growth but it has moved to an outcome-based pricing model from its current input-based model. For the first time HCL Tech crossed $4 billion in terms of revenue and the company signed eight multi-year, multi-million transformational deals, while in the fiscal 2012, it won 52 deals. HCL Tech believes despite over all IT spends being flat there are contract restructuring and significant churn in the renewables market and it looking to capture significant share through these two. HCL Tech CEO believes that Indian IT industry should look to convert challenges to opportunities and is focusing on the specialization, domain competency and vendor churn is playing out for HCL Tech and it is aggressively investing in the areas of infrastructure services, engineering and ERP (enterprise resource planning). HCL Tech has also inorganically with its acquisitions of companies like Axon and these acquisitions have been key drivers of growth for the company.

Indian IT industry is facing many challenges in the current year and all the four top players have announced specific strategies that will help them overcome the growth problems and are investing in technologies like Cloud Computing, Platforms, products & other nonlinear initiatives According to NASSCOM, aggregate revenue for the Indian IT-BPO sector is estimated to cross USD 101 billion for FY 2011-2012 and exports accounted for ~USD 69 billion( IT Services $40bn, BPO $16bn & Engineering Services & Products $13bn) , growing by 16.3% over the last fiscal year and for FY2013, the export revenues are expected to grow by 11-14% while the domestic revenues will grow by 13-16%.