Indian IT Industry–A new order seems inevitable

Analysts expect more churn and consolidation on the road ahead in the Indian IT industry as companies rediscover themselves or reinvent to sustain growth and remain competitive

The acclaimed British leader (and great orator) Winston Churchill had said, "however beautiful the strategy, you should occasionally look at the results." And appropriately for the booming Indian IT industry (worth approximately Rs2.60 trillion), there hasn't been a better time for a serious review of the results emerging from the Street. The plates are shifting underneath the surface and a new order is likely to emerge even as India races towards emerging as the fastest growing economy, possibly by the middle of this decade.

As the earnings season plays out, bringing with it an inevitable cycle of elation and disappointment there are clear indications of a changing order among the leading players in the industry. The biggest surprise has come in the form of HCL Technologies, the fifth largest IT services provider in India.
Analysts were pleased that finally HCL managed to post third quarter growth not just in revenues (31.5% year-on-year (y-o-y) and profits 33% (y-o-y) but a simultaneous upturn in net profit margins (10.3% to 11.3%) and improved cash flows. It is likely that the stock gets re-rated if the same kinds of results are delivered for the financial year.

HCL's better than expected Q3 results helped lift some of the gloom brought about by the worse than expected performance of IT bellwether Infosys Technologies, which has lost further ground to Tata Consultancy Services (TCS). When TCS came out with its results which were in line with expectations, there was relief on the Street that fears of an industry-wide slowdown were just an unwarranted reaction.

While the results may be encouraging in general for the Indian IT industry, the excitement and action are stemming from the changing market position of the long established leaders. TCS has emerged as the clear industry leader, pushing Infosys into a distant second position. In fact, TCS has taken the game away from Infosys for a long time now. In FY07 the gap was small, but sound strategy, persistent marketing and stable leadership helped create an ever widening gulf which stands at Rs9,824 crore in FY11.

The primary driver for this has been the bigger exposure TCS has to the Banking & Financial Services (BFSI) sector. 44% of its revenues come from BFSI, while in the case of Infosys the share of the vertical stands at 36%. The fact that BFSI has been at the forefront of the global recovery in the past two years has been an enormous factor in the dominance of TCS. The aggressive leadership style of its CEO N Chandrasekaran, who shoots from his stable perch, is in stark contrast with the situation at Infosys and Wipro Technologies.

The worries for Infosys grew with the loss of key personnel even as it has its hands full dealing with falling margins and slowing revenues. Mohandas Pai's departure was a precursor to the appointment of a new CEO-most likely Shibulal-and more importantly a new Chairman to replace its legendary founder Narayana Murthy. A few more people are expected to leave the organisation, leaving the leadership to deal with the ensuing vacuum.

The fluid situation at Wipro has been well documented. Azim Premji's company has set about revising its strategies and building a leaner organisation to recharge growth and better leverage costs. But this was no proactive development; Wipro was pushed to the wall by its competitor Cognizant Technology Solutions (CTS). CTS has emerged as the fastest-growing IT company amongst the top ten in the industry and most of this growth has come at the expense of Wipro.

Cognizant, much like industry leader TCS, has benefitted immensely from its focus on verticals just as much as Infosys and Wipro are paying the price for a centralised approach. Now that HCL also is ready to challenge the established order, there will no shortage of excitement in the months ahead. HCL is building significant momentum in the Enterprise Application and Infrastructure Management space and if it continues to progress at current rates, it could stake a claim for a spot among the top three players.

There is also action brewing in the lower rungs of the IT industry. Genpact, the domestic BPO giant made a significant investment to acquire Headstrong and expand into the IT services segment. It could set up a solid platform to fuel its ambitious growth plans.

Mindtree's sexagenarian founder is also lurking in the shadows. The man may be advancing in age, but his serial entrepreneurial instincts are far from dimming. The 67-year-old Ashok Soota announced the launch of Happiest Minds Technologies barely days after making an exit from Mindtree, another company that he found and helped prosper.

With so much action at the top and middle segments of this industry, we can expect churn and consolidation on the road ahead as companies rediscover themselves or reinvent to sustain growth and remain competitive.

1 decade ago
The difference between Infosys and TCS was that Infosys positioned itself as a high value- high cost provider, while TCS was willing to handle projects at all levels. Cognizant beat Infosys at the high value game and grew consistently on the basis of its strong fundamentals. Even today Infy is not a bad performer - however, to regain its leadership, it needs to infuse lot of management strength - split into clear SBUs, develop a strong line of IP based offerings, and cut flab to maintain cost/ productivity.
1 decade ago
Infosys results in the last few quarter has to be seen in full light The bellwether is undergoing through organizational changes lately, and I believe it will emerge from it stronger. Despite some high profile attrition at top, I believe that the succession planning at Infosys is in place and the company is not so much dependent on individuals for its overall performance. Infosys has visionary leadership and they have correctly identified the shifting tide in the industry and are much better positioned to compete now than ever. In next year or so other competitors will be playing catch up to Infosys
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