IN A WORLD turned upside down by the Covid-19 pandemic, IT industry lobby group Nasscom’s optimism stands out. “We are a $178-billion industry (excluding the hardware segment) which has the potential to touch $300-350 billion over the next year. Almost 70-80% of that will be driven by digital,” says Sangeeta Gupta, Senior Vice President, Nasscom. The reason is simple. The pandemic upended everything and forced companies to turn to digital offerings on the cloud to re-orient their work flow as established ways of conducting business were disrupted. Almost overnight, they adopted business practices that would have been rolled out gradually over the next few years.
While going digital was initially about supporting daily operations, over time, it has become central to overall business strategies. The global cloud market, for instance, is expected to grow to $832 billion by 2025. Companies across sectors are adopting artificial intelligence (AI), machine learning (ML), robotics and cloud computing to become more efficient and improve customer experience.
The big gainers of the trend have been leading Indian IT services firms. “Fence-sitters on digital transformation seem to have reached the tipping point, shoring up demand for services. Five years of digital acceleration has been compressed during the pandemic,” says Thierry Delaporte, CEO and Managing Director, Wipro. A study by industry body Nasscom earlier this year said organisations plan to increase digital investments by 30% in the next 18 months.
The rise in demand for services took combined revenues of India’s top five IT majors — TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra — to ₹4,39,826 crore in FY2021, 6% higher than in FY2020.
The momentum has continued in the first half of FY2022. In H1 of FY2022, the five companies reported revenues of ₹2,49,497.7 crore, 18% more than the same period of FY2021. TCS led with ₹92,278 crore (17.6% growth), followed by Infosys at ₹57,498 crore (19.2%). Wipro reported revenues of ₹37,920 crore, while HCL Tech grew 11.8% to ₹40,723 crore. Tech Mahindra revenues grew 14% to ₹21,078.9 crore.
This growth is driven by the urgency with which businesses are transforming digitally. In FY2021, the Indian IT industry’s digital revenue was $50-53 billion, accounting for 28-30% of the total. The growth was nearly 10% year-on-year, says the Nasscom report. Prior to this, growth has been in single digits only. “With Covid, digital acceleration has grown multifold. Today, every company has no choice but to have a digital front end and back end,” says Sangeeta Gupta of Nasscom. She believes adoption of digital by enterprises will widen opportunities for the IT indus-try, boosting their growth prospects.
Nitin Bhatt, Technology Sector Leader, EY, says clientele of IT firms wants to leverage the entire gamut of tech capabilities such as cloud, IoT, block- chain and AI to increase market share, margins and customer intimacy. “Enterprises realise that embracing digital is critical to not just survive but also thrive,” says Bhatt. He estimates that digital transformation and Cloud spends will double over the next five years. Digital now accounts for 56% of Infosys’ business, in sync with TCS, Wipro and HCL (40-50%).
“Within digital, our Cloud business is witnessing spectacular growth as our Cobalt (a suite of cloud solutions and services for enterprises) capabilities have resonated well with the clients,” says Pravin Rao, Chief Operating Officer and Wholetime Director at Infosys. Rao adds clients are increasing investments in digital channels and self-service products and tools. “We are confident of robust digital demand in the near future,” says Rao.
Blitz of Deals
In recent times, Indian IT firms have bagged a spate of digital transforma-tional deals. One of the biggest is Infosys’ $1.5 billion deal with Vanguard to drive digital transformation of the US-based investment management company’s record-keeping services onto a Cloud-based platform and Wipro’s deal to steer technology, engineering and solutions transformation of German wholesaler Metro AG; it is valued at $700 million for the first five years. Infosys also walked away with a $3.2 billion deal with German automotive major Daimler, billed by the IT firm as “probably the largest deal signed in the Indian IT services industry.” Infosys has won over 100 large deals in the past six quarters. COO Pravin Rao summed up the significance of digital in a remark last year: “I think there is an element of digital in every large deal because at the end of the day the large deal is not only about taking over and delivering the services. It is also transforming over a period of time.” Wipro closed 24 large deals in second half of FY2021 alone, generating a TCV (total contract value) of $2.6 billion. The deal bucket includes two mega deals (one being Metro AG), each of which, the firm claims, has the potential to lead to revenues of $1 billion over the duration of the deal.
TCS, on the other hand, wrapped up FY2021 with an order book of $31.6 billion, 17% higher than the previous financial year. In recent times, the company has grabbed a deal to power growth and tech transformation of the Multi Commodity Exchange of India. It has also added Japan’s Cainz Corporation and NXP Semiconductors to its growing list of clients. Samir Seksaria, Chief Financial Officer, TCS, says they want to accelerate investments in new technologies such as Cloud, data, AI, analytics, cyber security and enterprise applications.
In FY2021, HCL signed 58 large deals. New deal TCV hit $7.3 billion during the year, an 18% increase over FY2020.
BFSI & Retail Drive Spends
Not surprisingly, much of the action in digital has been driven by BFSI (banking, financial services and insurance) and retail that jointly command over 40% share of the IT industry’s revenue growth (at least for the top five companies). BFSI players are focussing on shifting critical workloads to the Cloud while building digital expertise to improve customer experience. Expanding capabilities in BFSI is critical, as underlined by Wipro’s $1.45 billion acquisition of the UK-based technology and management consultancy Capco. The retail sector, too, is increasingly tapping into technology to improve virtual customer engagement and leverage AR/VR and Cloud platforms for digital sales.
Rajesh Nambiar, Chairman and MD, Cognizant India, and President, Digital Business & Technology, says: “Our IoT business has scaled up rapidly and is expected to double this year. Overall, we are seeing strong momentum with a pipeline of deals. And win rates are up for the year.”
Tracking Profit Growth
The growth in revenues is reflected in a commensurate increase in profits, too. The net profit of the top five companies stood at ₹80,014.6 crore in FY2021, an 8.49% increase over FY2020. The firms collectively registered net profit growth of 13.81% over FY2019. In the first half of FY2022, TCS profits surged 28.6% to ₹18,632 crore. Infosys’ profits rose 16.9% to ₹10,616 crore, while Wipro’s grew 26.9% to ₹6,163 crore. HCL Tech profits grew 7% to ₹6479 crore. Industry executives expect new-generation technologies and services to power growth.
Dearth of Skilled Talent
While the digital-led IT boom is here to stay, companies will need to tackle the challenge of getting adequately skilled talent to deliver these trans-formational projects. In first half of FY2022, the top five IT services com-panies added over 1,22,000 people as compared to 1,38,000 people in all of FY2021.
The Indian IT services sector is facing a talent crunch and is in a hire-or-poach mode. To tackle the rising attrition levels, firms are focussing on re-skilling employees. The companies have doubled their budget for re-skilling and up-skilling programmes. This will rise further. “Re-skilling will be the key to our success with digital talent helping us fulfil growing digital demand,” says Pravin Rao.
According to the Nasscom Perspective 2025 Report, the share of digital technology investment will rise from 35% in 2020 to 60% in 2025. That’s another growth opportunity for Indian IT services companies.