Stingier customers, a digital shift, Brexit and an H-1B scare have slashed IT profits. But leading Indian firms have caught sight of a smarter path.
Used to consistently high growth numbers in recent years, the last few months have been rather challenging for the Indian IT sector. The $155 billion IT services industry in the country is in a flux as headwinds continue to hit Indian IT companies. Clients have not been as magnanimous about spending; a few developments have pummelled numbers too. With the Donald Trump presidency in the US, the sagging futures of the IT sector are expected to plunge further in the coming quarters.
Reflecting the bleak prospects and following a number of companies reporting low revenue growth, industry representative body Nasscom scaled down the industry’s growth figures for fiscal 2017 from 10-12 per cent to 8-10 per cent in November. Earlier this week, Nasscom did something it has not done in over two decades. It deferred a growth guidance for the financial year 2017-18 till the next quarter, hoping for some miracle.
According to Nasscom, the deferment was due to prevailing uncertainties. It is also because between November, when it revised its estimates, and now, nothing has changed—prospects are as bad as it were three months ago. The future, to reiterate, also looks dim.
“The short-term outlook remains uncertain because of global macroeconomic instability and political volatility. Cross-currency fluctuations and structural shifts also contribute to the uncertainty,” Nasscom said in a statement. It said that it will issue a guidance for the sector after a quarter, once it has interacted with all stakeholders and gets a clearer picture of the ground situation.
Although uncertain, Nasscom is likely to announce its guidance sometime in May after firms finalise their fourth quarter earnings and come out with their annual results, which would provide a clearer trend.
In the last few months, most large IT companies have been returning poor and less than expected numbers on revenues and profits with clients, mostly in the West and led by the US, tightening their IT spending, thus significantly affecting bottom lines of Indian firms.
Indian IT MNCs have been impacted by a number of factors—massive cannibalisation of revenue due to industrialised services and cloud, shift from labour to technology arbitrage, competition from local and much cannier players.
However, one of the main shifts expected to affect the sector in the next few years is the uncertainty over President Donald Trump’s immigration and H-1B visa policies. Trump has announced a proposal to tighten the H-1B visa programme and significantly increase salaries of those going to the US under the H-1B programme. The Indian IT sector—a major beneficiary of the programme—will be the hardest hit if the bills in the US Congress go through.
In 2015-16, Indian firms made up the single largest chunk from a single country to have been awarded H-1B visas. TCS had 4,674 visa-holders and was the largest beneficiary, followed by Cognizant (3,812), Wipro (3,079), and Infosys (2,830).
Says Jaideep Mehta, MD, IDC India, “The problems faced by the Indian IT industry is because of the extreme uncertainty from the announcements of President Trump and his policy on H-1B work visas. That is a significant challenge for the Indian industry, as a large part of the industry is affected by it.”
However, there are more fundamental issues that have affected companies’ prospects and performance over the last few years. The Indian IT industry’s business model is also significantly challenged as the way customers want to consume IT services has changed drastically in recent times.
“There is a contraction in the US companies’ discretionary spend, which is moving towards digital. Unfortunately, some top Indian IT companies are not able to divert their focus towards digital services. This is leading to growth challenges for Indian companies. Digital is a different game and companies are slowly making their digital strategy. Niche players are emerging in digital and these are not necessarily from India,” says Thomas George, senior vice president and head of CyberMedia Research (CMR).
At the same time, larger firms have not clearly defined their digital strategy—they have not hunted for digital companies and integrated them into their business. No large company has gone full force on acquisitions and are sitting on large cash piles. If they change their strategy, the situation can be very different.
Yet, concurrently, with external developments like Brexit and an impending H-1B crisis, discretionary IT spend is on a tight noose. In the last couple of years, IT contracts have become smaller and end users are more smarter in terms of IT spend. D.D. Mishra, research director, Gartner, says, “We see a declining unit price trend and more optimisation and utilisation of resources, better efficiency and productivity. Digital business is another impact; it’s creating more dependency on nimbler players and almost half of the new players will be relatively unknown ones in next few years.”
Also, Internet of Things (IoT)—the fiendishly growing internet connectivity in phones, cars, watches etc—is bringing unprecedented changes in the way services are delivered. Many IT companies are finding it tough to navigate the bewildering path of the relatively uncertain IT market.
However, experts feel problems are not on the demand side and things may actually improve in the Trump administration. Says Mehta, “On the flip side, President Trump is expected to reduce regulations impacting big banks, which is expected to improve the demand side. The real challenge however, might be on the supply side in respect of the H-1B visa issue.”
Experts and analysts are, however, hopeful that the Trump administration will not go ahead with its proposed changes in the H-1B programme. “I am optimistic that this government is business-friendly and will not implement anti-business policies or do anything that will backfire on it. After all, though 30-35 per cent of H-1B beneficiaries are Indian, large American Silicon Valley companies also benefit from the H-1B programme. The government cannot have a separate yardstick for them. It cannot be a straight-jacketed implementation of the programme. They are just talking,” says George.
Mishra feels that the future of Indian IT companies remains positive in spite of the changes wrought by the geopolitical situations in UK and US, so long they are able to anticipate and react. “The global IT services market in terms of end user IT spending will continue to grow somewhere between 4-5 per cent CAGR (compound annual growth rate) till 2020 based on Gartner forecasts in fourth quarter of 2016. As of now, Indian IT companies appear to be much smarter than their global peers and I have no reasons to believe that in the near future they will not be so,” he said.
Internally, there is also a clear move within large IT companies to embrace digital as their next focus area. While companies like Infosys have already placed their bets on digital and automation, new TCS CEO Rajesh Gopinathan exhorted employees to look aggressively at digital to get to the next phase of growth immediately after assuming office early this week. But the real change will happen when smaller, tier-II Indian IT companies face up to the challenge and speed up change within. Unfortunately, the rate of change in the outside markets is much faster than the necessary reaction by Indian IT companies.
Nasscom president R. Chandrasekhar says that initial data from global analysts on tech spending in 2018 is promising and he is hopeful that things will brighten up in the coming year. Cognizant, while predicting a stable demand for the future, has also come out with a guidance of 8-10 per cent for the year, which is not different from Nasscom’s November prediction. From the end of these positives, the situation isn’t as dire. While an unpredictable Trump may still cause some heartbeats to skip, Indian IT companies will need to reform their own stables and look aggressively at new business models if they want numbers to look good.