Time to Look Up

Time to Look Up

We have seen the worst of times – the recession in the U.S. economy had far-reaching implications and impacted the performance of the Indian IT companies and the Indian economy as a whole. This led to layoffs and a freeze on employment, and the effects percolated to the stock exchange and other industries as well.

The current fiscal’s third quarter performance of these companies signals a hope of revival.  IT majors like TCS and Wipro have not only registered higher revenues, but net profits too, and recruitments have started afresh. While Wipro registered a 19 per cent year -on -year (y-o-y) growth in profit-after-tax, TCS registered a 38.9 per cent increase in y-o-y net profit. TCS recruited over 7,000 employees during the period (as against 5,500 in Q2 of this fiscal), while Wipro recruited almost 5,000 during the October to December 2009 quarter.

Indicative of improving market conditions, the performance of large companies gives out positive signals for others in the sector as well as other segments of revival of the market. Agreeing to this, Kumar Parakala, Global Head of Sourcing, KPMG says, “TCS and Wipro are among the leaders of the Indian IT industry, and are good representatives of the sector in India. During the recession these providers, like the others, faced lowered billing rates, strong pricing negotiations and an increase in bench size. However, these companies have proactively handled these problems, and have used the recession as an opportunity. They have improved their employee utilization by putting bench employees on internal projects.” He adds that today, just as they represent the industry in the stock market, the improvements in their performance are indicative of the direction in which the Indian IT industry is moving.

Agreeing to this view, Shashi Bhushan, Senior Research Analyst, Prabhudas Liladhar, says in his report, “We believe that the growth momentum of top tier Indian IT services firm is likely to continue.” He also cautions that a discretionary spend in IT is still 2-3 quarters away but may witness some large transformational contracts in the coming months.

Growth Segments

During the recession period, it was believed that with the U.S. economy in recession, it was inevitable that Indian IT companies would have to focus more on new markets and segments, including catering to the domestic segment. However, the results have indicated the need for organizations to be vertical-focused even while strengthening their base with existing clients.

Says Parakala, “Being closer to the customer is becoming increasingly important. Service providers need to strategically move towards becoming a partner for the clients. Innovative delivery and business models would help in achieving a mutually beneficial partnership.”

Reflecting this view, TCS CEO and MD, N Chandrasekaran said at the time of announcing the results, “Our investments ahead-of-time in emerging markets, multiple industries and client relationships is reflected in our exemplary performance.”

Wipro officials too expressed this sentiment when they announced that their ability to offer integrated service lines and be a transformational partner to their clients helped them secure several large deals this quarter.

For the Mid-Cap Companies

In any economy, the leaders show the way to growth. While they would continue to get the lion’s share of business, the benefits of their performance will have a positive impact on the others down the line.

While Shashi Bhushan opines that mid-cap companies would lag the growth curve due to niche they are operating in, and grow at a pace slower than tier-1 companies, Parakala feels that the mid-sized and small firms, due to their size, have been able to react faster than expected, and have stabilized well in the recession. “Moreover, smaller firms with niche service offering seemed to have fared better during the downturn,” points out Parakala.

While mining existing clients and extending their strengths in the other verticals either through mergers and alliances or greenfield projects, these companies should also focus on cutting costs, newer markets, including the domestic market, to sustain this growth.

Implications for Economy

The growth of the IT segments will have its echoing effect on other segments as well. Recruitments and a defreeze on employment automatically will lead to spending, which will in turn lead to an overall economic revival.

Independently too, the industrial output is growing and there is positive manufacturing growth. “The positive growth in industrial production for the second consecutive month backed by a rebound in growth of manufacturing sector is

expected to speed up the economic recovery, which is predicted to happen in the second half of FY10,” says Kumar.

Agreeing to the view, Shashi also says, “We believe that economy is witnessing steady improvement. I think we have already seen decent bounce back in the market and we see constant improvement from here. I believe it would go to the previous highs, but the pace of recovery is going to be slow and bumpy as investors are still cautious.”

Future Trends

  • According to KPMG analysis, coming months will see:
  • Quicker decision-making for outsourcing deals that have been in discussion
  • The pressure on billing rates, that most Indian vendors had to go through during recession, will diminish
  • With global organizations realizing the benefits of offshoring, there will be a move towards companies considering sourcing as a strategic tool for cost-reduction
  • Focus on new geographies to reduce the exposure to the U.S. and European markets
  • Focus on the domestic Indian market
  • Growth in offshoring by SMBs based out of the U.S and Europe
  • India will also be looked at by non-English speaking countries as a favorable offshoring destination

Clearly, this is a critical time for not only the Indian IT industry but for the entire economy as well. The companies that played their cards right, strengthened their relationship in existing markets and expanded to new areas have been able to deliver the results, whatever the size of the company. But the fact that the large companies managed to retain their lead clearly gives analysts and the layman hope that recession is truly behind us.