There are couple of articles recently in ET, Business Line on the challenges our IT industry is currently facing. Due to a steep fall in the crude oil prices in previous fiscal, IT investments by clients in the energy vertical have delayed, reduced and some are cancelled. Telecom services providers are also not doing well and hence the revenues from those accounts had a hit. Also there is this cross currency impact While there is stagnation/decline in the incremental revenues of IT majors like TCS, Wipro, Infy, HCL for the last year we should also understand the drastic changes in the way IT business is undergoing.
Unlike previous times, there are many small firms who possess consulting capabilities and are able to sustain in the market by having a kind of conversations clients want. While all IT majors have strong consulting capabilities, the technology is changing at a drastic level where IT majors are having challenges to go to customer and say “this is what your business problem is, and we can solve with this ‘new’ technology”, says Forrester Research.
Let us speak about Cloud. Well, Cloud is not a new technology at least when we see time vs technology changes, but the business strategies associated with cloud are changing. Cloud is gradually disrupting the enterprise software and hardware industry by being easy to scale up the infra and being cost-effective. It is making computing services / resources available on internet. Cloud makes infrastructure like Storage, Servers, networking as a service. This reduces the infrastructure maintenance needs, and, hence, infrastructure services will reduce. Mid-range clients who don’t have huge infrastructure prefer cloud-based systems. This will hamper the sections of infra business in IT companies.
At the same time automation and robotics are also booming along with cloud. With burst of new technologies and delivery models there is high competition in pricing too.
However, there is still time to adapt, experts say, irrespective of new developments though the changes are drastic. At the same time client relationships matters over the price. Again IT majors have their plans in place. Wipro and Infosys has already made large acquisitions/investments in automation companies, and in startups. ET says Wipro is planning to improve the efficiency and bring the reduction of 30% in it headcount in next three years by investing in automations and artificial intelligence and digital technology. Infy CEO Sikka too mentioned “New areas in Infosys of automation and innovation will constitute a tenth of total revenue by 2020.” TCS has its own innovation Labs.
IT sector contributes to 12% of GDP and it has good growth in India
However, the second half of this fiscal year has a weak demand. This may put some pressure on IT sector in the near, considering their higher current valuations (The process of determining the current worth of a company.)
TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra — along with some of their mid-tier counterparts such as Hexaware Technologies, Infotech Enterprises, KPIT Technologies, Mindtree and Persistent Systems has earned healthy returns in 2013.
Source: Economic Times
A gradual renewal in the outsourcing demand in the US and the European market helped Indian IT players to resume on the growth path.
A sharp fall in the rupee against the major currencies during the first half of the fiscal further boosted the top line growth and operating margins.
However, the December and the March quarters are traditionally weak for IT companies due to the festival season and the financial year for many of the client firms to ascertain IT budgets for the next year. IT players naturally report a sequential volume growth of 1.5-3% during this period, compared with more than 3% increase in the first two quarters.
As seen in the December quarter, the rupee has more or less stabilized on an average. Some of the currency market observers have predicted this trend to continue in the remainder of the fiscal. If that happens, India IT players will not be able to enjoy higher top lines (sales), unless a major depreciation in the rupee takes place. Both these factors are likely to curb the pace of growth in the later of year 2014, which may impact valuations in the near term considering the facts that valuations have risen at a faster pace in recent months.
For more info please check out Economic Times Dec 31st 2013
Studies show that Chinese software outsourcing firms are unlikely to catch up with Indian and other global software services firms anytime in the near future, despite a major policy push towards outsourcing from China’s central government in recent years. Language barrier has also played a huge role in China’s inability to attract large outsourcing contracts at a time of increasing commoditization of IT services. According to a survey 79% of IT services firms in China have been in business for less than 10 years. On the other hand, top US and Indian IT firms have been around for the better part of the last three decades, in some cases, even longer.
China has also faced the problem of attracting the best talent, with the country’s engineering graduates not looking at IT services as a primary option for employment, instead focusing more on manufacturing firms. China currently trains 1.1 million engineers annually, according to a recent report by Kotak Institutional Equities. Since 2006, the Chinese government has tried to build expertise in software outsourcing. It identified 20 cities where such firms could be developed.
The average profitability of Chinese IT services firms went down from 10-15% to less than 5% over the past two years, while that at most large Indian firms was in the 15-25% range
Experts say China’s focus on the domestic market and Japan may have hindered its ability to gain market share in other growing economies.
To be sure, China’s IT industry was never considered to be a serious threat to traditional multi-national and Indian outsourcing giants, such as IBM, Accenture, TCS, Infosys, Wipro Etc.