Large Indian Information Technology (IT) and Business Process Outsourcing (BPO) companies will soon start announcing their financial results for the quarter ended 31 March 2012 and also for the financial year 2011-12. The result session will start with the second largest IT company Infosys Ltd, revealing its figures end of this week.
Based on the results of the past three quarters, the industry watchers are fairly certain that despite economic uncertainties in the developed countries, big companies delivered fairly good results in last financial year. All eyes, specially those who track IT company shares closely for investment purpose, are now on the outlook for the current financial year, 2012-13, which just began.
In a recent technology conference hosted for IT and BPO industry in San Francisco by the US-based Goldman Sachs (GS), one of the leading investment bankers in the world, leading Indian companies like Infosys, Wipro, HCL Technologies and Cognizant Technology Solutions expressed that though market conditions will continue to remain difficult, Indian companies will do well to grab a bigger share of the IT outsourcing pie in 2012.
There were several important takeaways at the GS Technology Conference, according to a report prepared by Global Investment Research wing of Goldman Sachs, which will not only be the trends at the marketplace but are also considered to be favourable for the Indian companies. The report pointed out that with a major part of customers’ IT budgets finalised in the first two months of the year, companies have more clarity on the shape of budgets for 2012. It found most companies suggested that budgets will remain flat in 2012 compared with 2011.
Agreed Infosys Ltd Head of Consulting & Systems Integration and Member, Executive Council, Stephen Pratt, who attended the GS conference. “We expect total IT services budget to be flat to marginally down in 2012 with overall pricing to remain stable, so market share gains and a further shift toward offshore will be key to sustained revenue growth.”
It was also found that the discretionary spending cycle of the clients is stabilising, as companies are witnessing a certainty in the client decision-making cycle across businesses, with relatively better visibility into discretionary spending cycle, including consulting and system integration areas. Clarity on discretionary spending also points to the fact that IT clients are not just sticking to the ADM (application development and maintenance), which is the largest chunk of business for the Indian companies, but are getting ready to spend money on new processes and applications. This certainly is good news as discretionary spends opens up new opportunities and offers better profit margins.
It was also found that companies are likely to be more committed in spending their IT budget in the current year as opposed to 2011 when IT budgets were not spent.
Wipro Ltd CFO, International Operations, Sridhar Ramasubbu, who made presentations at the GS conference said that though Wipro expects budgets to remain flat to moderately down in 2012, the discretionary spending part still remains modest with a stable pricing environment.
“Wipro is not seeing any major changes in customer behaviour across the board, except some cases in the banking and financial vertical in the European region. Europe remains a concern among clients, amid an expectation of flat GDP growth this year,” Ramasubbu said.
The reason Indian companies are more optimistic is that India has the largest share in the world in IT outsourcing. Goldman found that offshore remains a secular growth area as corporates are trying to strike a balance between flat dollar budgets and the need to spend on growth initiatives by shifting more maintenance and infrastructure management work to offshore vendors. A recent report on the Indian IT industry by Standard & Chartered viewed that the next leg of growth for Indian offshore players will be driven by market share grab from global players in existing contracts coming for renewals, as clients strive to optimise their spend on operational expenses. The Report said that its analysis indicated a pipeline of 1,095 contracts which are now with non-Indian vendors with a combined total contract value (TCV) of $207 billion due for renewal over the next five years. This could translate into a US$25billion opportunity for Indian offshore players.
In this context, Cognizant Technologies President Gordon Coburn and CFO Karen McLoughlin, were of the view that despite a flattish budget outlook in 2012, CIOs will not indiscriminately reduce maintenance or discretionary spending but will increase their usage of global delivery models, which plays to Cognizant’s strength.
“The service requirements from clients have also evolved from pure technology execution to utilising technology to solve business problems, which requires significant front-end skills and domain knowledge,” Cognizant said at the Goldman conference. To this end, the company believed it is ahead of many of its offshore peers due to it heavy investments over several years.
It also expects another year of industry-leading revenue growth, currently pegged at 23 per cent, driven by continued penetration of existing clients and mix shift toward global delivery. Another factor helping Indian IT companies is that IT clients are increasingly going for blended outsourcing model in annuity deals.
New markets
The shift over the last two years is clear: from a total outsourcing model — where the entire/bulk of non-discretionary IT services is handed over to a single system integrator (such as EDS, IBM GS or CSC), to a blended outsourcing model where large deals are broken into smaller sizes and are distributed to multiple vendors to optimise the total cost of ownership.
HCL Vice-Chairman & CEO Vineet Nayar, also thinks that this trend is very clear and getting stronger.
“Many large client organisations who were locked in with deals having high billing rates during the recession time, are now restructuring such deals by opening them up for competitive bidding,” Nayar said. “We are seeing that the deal sizes are getting smaller and vendor-churn is happening in 30 per cent of the deals as against only 5 per cent earlier,” he said.
While North America, traditionally remains the largest market for IT outsourcing, Europe is also emerging as a growth driver. Emerging markets and Asia-Pacific are bringing pockets of incremental growth opportunities, however, Europe may remain a key growth driver for the offshore vendors, as European companies facing significant cost pressures look to send more work offshore to save dollars. Among the market segments the traditional BFSI (banking, financial services and insurance) vertical is witnessing weak demand growth and within this, the investment banking related clients are witnessing weakness in sequential growth.
Though this is bad news for Indian companies having strong presence in BFSI vertical, there are newer areas that look very promising. Cloud, analytics and mobility are the newer areas with the potential of long term growth.
Said the Goldman report, “Among the long-term growth drivers for the sector, companies
stated that investments in growth strategies, offshore, cost reduction, regulatory and new technology initiatives like cloud, analytics, mobile, social net work are providing for revenue growth opportunities.”
Just as global enterprise clients are focused on investing for growth as well as cost reduction initiatives, Infosys also expected increased regulatory and compliance initiatives to be a positive demand driver for consulting and in turn helping large Indian companies. Similarly, Cognizant believed its total addressable market has doubled over the last three years driven by broadening of services into areas such as consulting, BPO, and infrastructure management, as well as incubation of next generation solutions including IP-based products and platforms, new technologies, and business process as a service.
Small growth in IT spending
Though the global research firm Gartner expects the global IT spending growth in 2012 to be around 2.5 per cent, lower than its earlier estimate of 3 per cent, the Goldman Research kept the growth rate at 3 per cent because its latest IT spending survey showed positive gains in both the tech and capital spending indices.
“Based on the latest data captured in our most recent CIO survey (completed in January 2012), the overall IT spending index for 2012 increased to 69.0 (from 59.5) and the capital spending index increased to 64.5 (from 55.0).” Goldman said this improvement coincided with improved year-end developments with Europe sovereign debt issues. It also found some stability in pricing index though discounting remained rampant.
Source:http://www.deccanherald.com/content/240583/indian-players-await-good-show.html