The Indian IT sector is facing challenges with slowing growth rates and increased competition. Revenue growth for major Indian IT companies like Infosys and Wipro has been disappointing, with Infosys missing guidance for FY12 and lowering guidance for FY13. Growth in key markets like the US and Europe has remained moderate or those economies have slipped back into recession, slowing client decision-making. In addition, the Indian IT sector faces increased competition from global players establishing operations in India as well as new providers in emerging markets.

1. INDIAN IT SECTOR
WORST IS OVER OR YET TO COME

2. “Many of the ramp-ups we were expecting did not happen....we had sudden ramp downs”
SD Shibulal, CEO and MD Infosys

3. The growth in the service sector in India has been led by the IT–ITES sector, contributing
substantially to increase in GDP, employment, and exports. The sector has increased its
contribution to India's 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 export
and domestic revenue stood at US$59 billion and US$29 billion respectively. The top seven
cities 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 export
driven, the domestic market is also significant with a robust revenue growth. The industry’s
share of total Indian exports (merchandise plus services) increased from less than 4% in
FY1998 to about 25% in FY2012.
India's growing stature in the Information Age enabled it to form close ties with both the
United States of America and the European Union. However, the recent global financial crisis
has deeply impacted the Indian IT companies as well as global companies. As a result hiring
has dropped sharply, and employees are looking at different sectors like the financial service,
telecommunications, and manufacturing industries. Moreover the sector continues to face
challenges of competitiveness in the globalized world, particularly from countries like China
and 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 first
quarter 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’s
projection of 11-14% growth. Although TCS and HCL Technologies gave satisfactory results
TCS became the first Indian IT company to cross the $10 billion revenue mark. HCL
Technologies client addition was robust with 14 new deals worth $1.5 billion in the March
quarter. 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 slack
decision-making and ram-down by clients. India exports software and services to nearly 95
countries around the world. The share of North America (U.S. & Canada) in India’s software
exports is about 61 per cent. In 2010-11 Wipro derived approximately 55% of IT services
revenue from United States and 27% of IT services revenues from Europe. For Infosys North
America contributed 64.2% of our revenue, up from 63.7% last quarter, while revenues from
Europe declined slightly to 21.3% compared to 22.1% in the previous quarter. India and the
rest of the world contributed 2.6% and 11.9% revenues respectively.

4. United States, which is one of the major markets for Indian IT sector, is not growing as per
expectation. Federal Reserve officials expect the growth to stay “moderate”. Europe another
key 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 GDP
shrinking for the second quarter. Britain’s economy shrank by 0.2% in the 1st Quarter of
2012, following a 0.3% drop in previous quarter. TCS and Wipro have indicated that the
clients slowed down decision making on deals in the last quarter of 2011-12. Industry
watcher believe that given the uncertain economic environment in large markets, like Europe
and US, decision making is likely to be slow.
Indian IT sector is also facing increased competition. According to analysts there are three
reasons for this increasing competition. One, pricing alone does not differentiate the
provider any more. Nearly all global majors including IBM, Accenture and Cap Gemini have
established or are establishing their footprints in India. Two, cost savings is just one of the
many expectations that the customers have from service providers. Finally, increasing
competition is not just from the likes of IBM and Accenture but also from a new breed of
ambitious service providers in Latin America who are tapping US & Europe markets and the
likes of Google, Amazon and Sales force which are offering services like “Software as a
service” (Saas) or “Platform as a service” (Paas) . Google drive a new cloud based service
provides 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. Few
years 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 large
MNC’s which have a presence in India. The tenure of outsourcing contracts is also coming
down. The contracts which were 8-10 years in tenure are now being renegotiated to 3-5
years long contracts.
Clients are demanding new pricing models, a presence across geographies and greater
sharing of risk from Indian vendors. The industry has also had to deal with skyrocketing real
estate and infrastructure costs in Tier-1 cities. Due to these escalating costs, many pundits
argue 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 and
Tier-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, the
cost of training goes up. On an average, the cost as the cost of training is about Rs. 40000 to
Rs. 60000 per agent.

5. Getting a work visa has become far more expensive and tougher as rejection rates have
increased dramatically. Infosys is being investigated for alleged visa fraud. TCS is facing a
class-action law suit in the US for allegedly keeping US tax refunds of Indian employees
working abroad. As the US presidential election looms closer Indian IT companies can brace
for 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 companies
struggled to get visibility. The recent announcement by government on giving preference to
domestically manufactured electronic goods in procurement by all government departments.
Off late, Indian consumers have been able to enjoy the benefits of new technology and
services. 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 software
exporting zone are now being subject to Minimum Alternate Tax (MAT), which were
previously tax free.
There is divergence in the government itself. While Industry ministry wants to encourage IT
companies the finance ministry is seeking to increase the tax revenue from the sector by
restricting the deduction claimed U/s 10A of Income tax Act, which relates to tax exemption
for 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’s
not going to be anywhere close to the robust growth the industry witnessed before
September 2008. Let’s just hope for the best.