Tech Majors Back in the Fast Lane

Cos will return to double-digit growth rates of 18-22% in FY11, say analysts

In a year when top outsourcing customers have resumed spending, India's leading tech firms are preparing to announce their return to double-digit growth rates and are tweaking their business models as they set their sight on crossing the $10-billion revenue mark within 2-3 years.
Senior executives at Tata Consultancy Services, Infosys Technologies, Wipro and HCL Technologies — the country's top four outsourcing firms — are busy preparing plans to outgrow rivals and in some cases, even regain lost ground. As these companies prepare to announce their March quarter earnings next month, a return to double digit growth is among the least of expectations, what lies ahead in coming years is what's causing a scramble among some of them. At least five brokerage analysts ET spoke with over the past two weeks said TCS, Infosys, Wipro and HCL will report sequential revenue growth anywhere between 4% and 7% for the March quarter. For the year ending March 2011, these analysts said, India's top tech firms will return to double-digit growth rates of 18-22%.
"Unlike the past few years when the focus used to be on next year's growth, this year there were more talks about becoming a $10-billion, and even $20-billion company," said a senior executive at one of the top five Indian tech firms, who is involved with the strategy team. While TCS plans to widen its revenue gap with Infosys and others even more, Infosys has rebranded itself as a consulting-led firm. Wipro, which recently shifted to a single CEO model, has already drafted plans to create a simpler structure with different business units headed by senior leaders managing profit and loss accounts. Cognizant is already causing rethink among the toptier Indian tech firms.
"Earlier it was about Wipro losing its position to Cognizant, now even Infosys and others are looking at the multinational rival and wondering how long before they catch up," said an expert tracking these companies.
Some experts and company officials say both TCS and Cognizant are separating themselves from others in the tier-I league on faster revenue growth, higher incremental revenues, profit growth and even net employee addition. During two of the toughest years Indian IT has ever seen — 2009 and 2010 — the separation between TCS, Cognizant and others became more clear. For instance, during calendar years 2009 and 2010, Cognizant and TCS added $1.77 billion and $1.52 billion in incremental revenues, growing at 27.7% and 11.8%, respectively. In comparison, while Wipro grew at 7.5% and added $672 million in new business, Infosys just managed to achieve 10.7% growth and had incremental revenues of almost $1 billion.
On the employee front, TCS added 56,571 new staff during 2009-2010, more than double of 24,701 employees hired by Infosys and Wipro's 20,722. "It's a little too early to call who the winners are — the jury is still out," said the CEO of one of the top ten Indian tech firms.
Experts such as John McCarthy, principal analyst at Forrester say despite all debates about who are bigger, customers are not really bothered about the pecking order. "This is a legacy fixation of vendors — the positioning needs to be around domain and transformational expertise," said McCarthy. "The classic proposition for outsourcing is dying, and vendors need to realise that," he added.
While faster growth looks good for investors, customers are more concerned about what a vendor can offer beyond pure cost savings. "It's unlikely that faster growth in the past two years help these companies win a lot of new clients. A 5% or 10% difference in growth rates does not make such a big difference to the client. What a client looks at is the capability, the domain expertise and the pricing," said Amneet Singh, vice-president, global sourcing, Everest Group. For HCL Technologies, the strategy has been about gaining more business by going for total outsourcing contracts —an area where profitability can get affected, according to analysts. HCL's strategy of focusing on market share gain has yielded good results over the past 18 months as HCL has grown revenues ahead of peers.
"That said, the concomitant deterioration in margins and cash flows has meant that there isn't enough in the plate at the cash profit level for investors. While we do not think having a lower margin is necessarily a bad thing, it needs to be accompanied by solid revenue growth over an extended period of time (which Cognizant has demonstrated," CLSA analysts Nimish Joshi, Bhavtosh Vajpayee and Arati Mishra said in their February report to investors. "Hereon, HCL would need to show more proof points on margin maintenance with revenue growth for us to take a constructive view," CLSA experts added. Even as the top tech firms fight it out, mid-tier firms continue to grapple with their next big landmark. "Till now hitting the billion dollar mark used to be the psychological barrier but now, more companies will hit this mark, but the benchmark will change — it will now start from about $2.5 billion," said Mr Singh of Everest.