Bangalore/Hyderabad: In March, when Employees’ State Insurance Corporation, a government of India agency that provides health insurance to 10 million workers, awarded a Rs1,182 crore information-technology (IT) project to Wipro Ltd, it dropped the curtain on a bitterly fought battle.
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Wipro, the country’s third largest information technology services exporter, won the order through a global tender that pitted it against both multinational firms and domestic peers such as Tata Consultancy Services Ltd, or TCS, and Infosys Technologies Ltd. The intensity of competition was an indication of the growing importance of the Indian IT market for both domestic and overseas firms.
With recession in the US, Europe and Japan forcing overseas clients to pare technology budgets, Indian IT companies are scrambling to raise their share of the Indian software and IT services market, which industry body Nasscom values at around Rs57,200 crore.
Mumbai-based TCS and Bangalore-based Infosys, India’s largest and second largest IT service exporters, respectively, have set themselves the target of earning $1 billion, or around Rs5,000 crore, in revenue from the domestic market in the next three to four years. Wipro wants to raise its India focus, as does mid-sized firm MindTree Ltd.
With sectors such as government, energy and utilities, telecom, banking and finance stepping up their IT spending, the domestic market has become attractive for firms that have until now focused beyond Indian borders. Customers in the US and Europe have traditionally made up as much as 80% of revenue earned by Indian exporters of software and related services.
According to a late 2008 report by research firm Gartner Inc., the Indian IT software and services segment, excluding business process outsourcing, is expected to grow at an annual pace of almost 20% to touch $13.2 billion by 2012.
TCS earns around $500 million (Rs2,500 crore), or nearly 8% of its total revenue, from Indian clients.
“We have a base of key clients and solutions portfolio. We have made investments and have people, business and clients. We will accelerate all of this,” a TCS spokesperson said in an emailed response.
However, the worry at TCS is that “India, like other emerging markets, is volatile and most business is project-based and not annuity based—hence there is a certain element of uncertainty,” the spokesperson said.
The volatility shows up in the India revenue fluctuations at TCS. While in the first quarter of the 2009 fiscal the company earned 8.7% of its revenue from India, the portion dipped to 6.8% by the third quarter, only to rise to 8.2% in the last quarter again.
Infosys earns less than 2% of its revenue (or less than Rs400 crore) from the domestic market.
“The market is very large, and has matured over a period of time,” said Binod H.R., head of the India business unit of Infosys, an initiative started just over a year ago to penetrate the domestic market more aggressively. He said a “big challenge” is that Indian customers are very price-sensitive.
For companies such as Infosys that have been used to higher billing rates in the US and European markets, Indian projects raise the challenge of being able to offer competitive pricing to customers while still being able to maintain comfortable margins.
“We are working on reusable tools and replicable models to address the challenge of lower pricing that the Indian market poses,” said Binod.
Still, margins are getting increasingly closer to international levels, according to Anand Sankaran, chief executive officer of Wipro Infotech, the unit that oversees the domestic and West Asia IT business at Wipro.
“Unlike some of our Indian peers, who are now discovering the potential of the domestic IT market, Wipro has always had a significant presence here. While it is true that it is a ‘value for money market’, the margins here are comfortable and getting closer to international margins,” he said.
Wipro is one of the largest system integrators—IT companies that bring together component subsystems into a whole—in India and, according to Springboard Research, has the second largest share of the domestic market after IBM Corp.
Bangalore-based MindTree hired a Wipro veteran four months ago to spearhead its domestic market growth. P.K. Gopalkrishnan, senior vice-president and India business head–IT services, said MindTree earns up to 5% of its revenue from India and aims to double it by 2014.
Increasing the domestic market share would, however, not be easy.
It entails competing with global technology firms such as IBM which, according to a late 2008 report by research firm IDC, commands a 10% share of the Indian market. IBM is the market leader and earns revenue of around Rs5,700 crore from the Indian market.
“It’s only because of sheer neglect that the Indian companies lagged behind in the domestic market space,” says Arup Roy, a senior research analyst at Gartner. “Indian companies also used to take the domestic market deals very lightly and put freshers or inexperienced engineers on the projects.”
Industry observers say that estimations of the domestic market may not capture the real potential because a lot of demand is still latent. Service providers have to first help clients identify problem areas and then design solutions.
“There is no dearth of opportunities in the Indian market, but it takes a patient services provider who can work with the client to literally convert the latent demand into real demand,” said Nasscom vice-president Rajdeep Sahrawat.
Graphic by Sandeep Bhatnagar / Mint