Despite the impending dark overtones cast on India’s IT sector, the reality on the ground is far from anything bleak. Irrespective of the announcements from US president Donald Trump, Brexit concerns and the slowing global economy, the IT sector seems to have factored the low spell and will be only marginally impacted. The sector will likely grow 8-9 percent in FY2017E and could grow at same pace or accelerate in FY2018, according to a technology report from Kotak Instituitional Equities released a week ago.
The outlook for 2017 looks ‘promising’ though admittedly it faces risks from current negative news wave against outsourcing. For the calendar year 2017, the set-up is promising, says the report, because of initial indications of higher spending in financial services vertical, announcements of integrated digital deals, albeit sporadic, and no acceleration in intensity of captive shift as witnessed at the beginning of calendar year 2016.
“These factors indicate that CY2017 holds promise for the Indian IT. However, these positives are partly negated by simple roll-over of budgets, awaiting broad policy direction of the new US government leading to soft start to the year,” states the report. Hence, divergence in performance of companies can be expected depending on the mix of business (run versus change) and ability to capitalise on the digital opportunity.
However, this is totally subjective and depends on how invested the company is in a particular market and where its revenue accruals come from. It is true that 60 percent of business comes from US and the dependence of the workforce is largely on H-1B visa.
“It all depends on how deeply invested you are,” says Sanchit Vir Gogia, Chief Analyst and CEO of Greyhound Research. “It is not going to be easy for the companies, its investors to accept new business models in this scenario. There is investor pressures internally,” he pointed out.
These are exciting times, say some industry stalwarts. It is a time to look forward to the change, said N Chandrasekaran, who is set to take over the chairmanship of Tata Sons next week, at the annual Nasscom conference on Wednesday. "Every time there is a regulatory change or some kind of a perceived challenge, in our industry, everybody says 'there is a problem' ... and it is hyped up whether it is H-1B, whether it is increase in re-staffing."
In fact, he said these are exciting times for the IT industry given the exponential demand for technology as every business reorients itself. "Fundamentally, every business is going to be powered by technology. So, the opportunity and the demand that we are going to see is just exponential," he said.
"Change is something you have to live with. You cannot get overly paranoid, I don't think there is a cause for concern, I really feel the opportunity is immense," Chandrasekaran added.
The quarterly results of some top IT players were in line with estimates and in sync with seasonal weakness, the Kotak report states, with the exception of Tech Mahindra. Tech Mahindra led the pack with 5.4 percent q-o-q constant currency growth followed by HCL Technologies at 3 percent, TCS 2 percent, Wipro 0.6 percent, respectively. Infosys’ 0.3 percent constant currency revenue decline was due to ramp down in RBS project, sluggish growth in specific geographies and service mix.
There will be a shift in markets from the current US-focus, and contracts may shrink too to shorter duration, said analysts. Upfront payments for contracts may change to pay-as-you-go, predicts Gogia. “The Indian market will not be enough as a sole market to cover costs. That is a reality that has to be factored in,” says Gogia.
But there is no need to worry as India’s startup sector is on a growth curve and though the sector will take a few years to mature, it is time to focus on putting India’s startup sector on the global map. It requires the attention and focus of the government, incubators, and companies – of which some like Tech Mahindra, Reliance Industries, for instance, have started taking keen interest to promote and fund.
The churn that one is seeing in the IT sector is part of the life cycle of any economy. The industry has seen a churn in 2000 with Y2K, later in 2008 with the global financial crisis. But the industry has sailed through each of these crises situations earlier, says Harish HV, partner, Grant Thornton, adding that there is no reason not to overcome Trump's promise of heavy restrictions on the outsourcing industry coupled with Brexit and the slowing global economy.
US is the biggest market and the worry about losing out on this huge market and talent losing interest in the sector as foreign assignments will no longer be par for the course is being hyped a lot, believe some experts. “How much of that is real,” asks Harish. He feels that some IT majors like Infosys, for instance have been prepared for this change with CEO Sikka shifting his office to the US. Soon others will follow, he said. There are enough opportunities in India too which will now come up, he said.
The focus will be on India and though growth may be impacted in the short-term, the impact will not be as large as it is feared, point out analysts. Changes have been brought in with some of India’s leading IT firms using local resouces onsite. Not just that, automation has also reduced the dependency on people/labour by 20-30 percent. This could go up to 40 percent in the future, says DD Mishra, Research Director, Gartner - IT research and advisory firm.
With the west becoming inaccessible, the focus will be towards east. Markets in the Asia-Pacific region will have good growth opportunities as many organisations have increased their share of revenues in this region and many others will expedite their focus here, says Mishra. India, China, Indonesia, Malaysia will get more focus from providers, believes Mishra.
The Gartner forecast report on IT services says that overall IT services end user spending is expected to grow at CAGR 4.5 percent between 2015 to 2020. Countries like India will have a CAGR at 14 percent in 2017. Others countries like China with current growth of 8.7 percent will grow at more than 10 percent. Cloud infra as a service will grow at CAGR of over 40 percent in India and China. BPO services continue to grow, consulting services is expected to grow at CAGR 8 percent, with implementation leading this growth. The forecast has not taken the H1 b visa issue into account, though. “It will have a minor impact only to those providers who are focused solely on this market,” said Mishra.
Mukesh D Ambani, RIL Chairman on Wednesday advised the industry to look at restriction on H-1 visa as a blessing in disguise and focus on the domestic market. "Trump can actually be a blessing in disguise. The domestic IT industry can focus on solving problems right here, which is a huge market," he said. Perhaps, it is time to do just that.
(Data contribution by Kishor Kadam)
Updated Date: Feb 21, 2017 12:49 PM