“Many of the ramp-ups we were expecting did not happen....we had sudden ramp downs”SD Shibulal, CEO and MD Infosys
The growth in the service sector in India has been led by the IT–ITES sector, contributingsubstantially to increase in GDP, employment, and exports. The sector has increased itscontribution to Indias GDP from 1.2% in FY1998 to 7.1% in FY2011. According to NASSCOM,the IT–BPO sector in India aggregated revenues of US$88.1 billion in FY2011, where exportand domestic revenue stood at US$59 billion and US$29 billion respectively. The top sevencities that account for about 90% of this sectors export are Bangalore, Chennai, Hyderabad,Mumbai, Pune, Delhi, Kolkata, Coimbatore and Kochi. Export dominate the IT–ITES industry,and constitute about 77% of the total industry revenue. Though the IT–ITES sector is exportdriven, the domestic market is also significant with a robust revenue growth. The industry’sshare of total Indian exports (merchandise plus services) increased from less than 4% inFY1998 to about 25% in FY2012.Indias growing stature in the Information Age enabled it to form close ties with both theUnited States of America and the European Union. However, the recent global financial crisishas deeply impacted the Indian IT companies as well as global companies. As a result hiringhas dropped sharply, and employees are looking at different sectors like the financial service,telecommunications, and manufacturing industries. Moreover the sector continues to facechallenges of competitiveness in the globalized world, particularly from countries like Chinaand Philippines.The financial results declared by most of the Indian IT companies were quite disappointing.Revenue growth for Wipro’s IT services was lowest among peers and its guidance for the firstquarter of FY13 was disappointing. Infosys missed its last quarter guidance for FY12;moreover the company’s revenue guidance of 8-10% for FY13 is much lower than Nasscom’sprojection of 11-14% growth. Although TCS and HCL Technologies gave satisfactory resultsTCS became the first Indian IT company to cross the $10 billion revenue mark. HCLTechnologies client addition was robust with 14 new deals worth $1.5 billion in the Marchquarter. HCL has 4 clients with over $100 million billing compared with just one a year ago.Companies are blaming this slowdown on patchy domestic revenues, unexpected slackdecision-making and ram-down by clients. India exports software and services to nearly 95countries around the world. The share of North America (U.S. & Canada) in India’s softwareexports is about 61 per cent. In 2010-11 Wipro derived approximately 55% of IT servicesrevenue from United States and 27% of IT services revenues from Europe. For Infosys NorthAmerica contributed 64.2% of our revenue, up from 63.7% last quarter, while revenues fromEurope declined slightly to 21.3% compared to 22.1% in the previous quarter. India and therest of the world contributed 2.6% and 11.9% revenues respectively.
United States, which is one of the major markets for Indian IT sector, is not growing as perexpectation. Federal Reserve officials expect the growth to stay “moderate”. Europe anotherkey market for Indian IT sector is still in throes of crippling recession. As recent data revealed,the UK has slipped back into recession. Britain slipped back into recession with its GDPshrinking for the second quarter. Britain’s economy shrank by 0.2% in the 1st Quarter of2012, following a 0.3% drop in previous quarter. TCS and Wipro have indicated that theclients slowed down decision making on deals in the last quarter of 2011-12. Industrywatcher believe that given the uncertain economic environment in large markets, like Europeand US, decision making is likely to be slow. Indian IT sector is also facing increased competition. According to analysts there are threereasons for this increasing competition. One, pricing alone does not differentiate theprovider any more. Nearly all global majors including IBM, Accenture and Cap Gemini haveestablished or are establishing their footprints in India. Two, cost savings is just one of themany expectations that the customers have from service providers. Finally, increasingcompetition is not just from the likes of IBM and Accenture but also from a new breed ofambitious service providers in Latin America who are tapping US & Europe markets and thelikes of Google, Amazon and Sales force which are offering services like “Software as aservice” (Saas) or “Platform as a service” (Paas) . Google drive a new cloud based serviceprovides 5GB of free space while paid plan provides 25GB at just Rs 130 per month.Competition is also increasing due to the fact that the deal size and tenures have shrunk. Fewyears ago, $100 million deals were in play. Now deals are more in $25-50 million range.Moreover even smaller deals are being fought out by not just tier II companies but the largeMNC’s which have a presence in India. The tenure of outsourcing contracts is also comingdown. The contracts which were 8-10 years in tenure are now being renegotiated to 3-5years long contracts.Clients are demanding new pricing models, a presence across geographies and greatersharing of risk from Indian vendors. The industry has also had to deal with skyrocketing realestate and infrastructure costs in Tier-1 cities. Due to these escalating costs, many punditsargue that the trajectory of 30% annual growth is unsustainable going forward; As a result,many Indian BPOs in Tier-1 cities have been looking at migrating operations to Tier-2 andTier-3 cities. Indian BPOs’ competitive edge is being further eroded as wages rise by 10-15%p.a. as a result of skill shortage. The attrition rate is as high as 60% and because of this, thecost of training goes up. On an average, the cost as the cost of training is about Rs. 40000 toRs. 60000 per agent.
Getting a work visa has become far more expensive and tougher as rejection rates haveincreased dramatically. Infosys is being investigated for alleged visa fraud. TCS is facing aclass-action law suit in the US for allegedly keeping US tax refunds of Indian employeesworking abroad. As the US presidential election looms closer Indian IT companies can bracefor some heat on job losses related to off-shoring.The year 2012 started a bit like 2009 with budget delays as a result of which companiesstruggled to get visibility. The recent announcement by government on giving preference todomestically manufactured electronic goods in procurement by all government departments.Off late, Indian consumers have been able to enjoy the benefits of new technology andservices. If preferred manufacturing becomes a norm, the time lag will reverse and widen.This will over time have negative impact on software industry. Moreover units in softwareexporting zone are now being subject to Minimum Alternate Tax (MAT), which werepreviously tax free.There is divergence in the government itself. While Industry ministry wants to encourage ITcompanies the finance ministry is seeking to increase the tax revenue from the sector byrestricting the deduction claimed U/s 10A of Income tax Act, which relates to tax exemptionfor software export income by units registered with Software Technology Parks of India.Most analyst expect that growth momentum for the sector will pick up later this year but it’snot going to be anywhere close to the robust growth the industry witnessed beforeSeptember 2008. Let’s just hope for the best.