New Delhi: Three years after it encountered a mini-crisis in the wake of the global financial crunch that followed the crash of Lehman Brothers, India’s fabled information technology (IT) services industry finds itself in the same place.
In 2007-08, customers in the US accounted for 60% of the revenue of Indian IT services companies. In 2010-11, they accounted for 61.5%.
It is the rare CEO who will say it is not important to bring down this proportion. “Reducing dependence on the US market is important from a de-risking perspective. Growth in emerging markets is at a higher rate, but on a small base,” Infosys Ltd’s former CEO S. Gopalakrishnan said just days before he was elevated as the executive co-chairman of the company.
It is also the rare CEO who will say this is easily done.
“The recovery in North America after the downturn was faster than in any other geography, so the dependence (on that market) continues. The US is a $13-14 trillion economy and its closest rival is only $4-5 trillion, so in that sense it is the most dynamic,” he added.
The problem for the stars of India’s $60 billion by revenue (in 2010-11) IT services business is that the dependance on the US is beginning to pull down their stocks.
Between 1 August and 30 August, BSE’s IT index has fallen 13.9%, the most by any sectoral index after the metal and realty indices. Indeed, until Friday, it had fallen 19.8%; it regained some ground on Monday and Tuesday. Several brokerages have downgraded the sector. The reason? The exposure of Indian IT services companies to the US market.
That won’t change anytime soon, said an expert.
“Well, if you expect a complete turnaround in such a short time, it’s not happening. Historically, the US has been the largest spender on technology. To be fair to the service providers, they are putting in all efforts to expand outside the US in locations such as Central Europe, Germany, South-East Asia or even the domestic market,” said Siddharth Pai, partner and managing director at outsourcing advisory firm, TPI Advisory Services India Pvt. Ltd.
Cognizant Technology Solutions Corp., which overtook Wipro Ltd in the last quarter in terms of revenue, and which relies on the US for almost 78% of its revenue, is trying to diversify its revenue stream. R. Chandrasekaran, president and managing director, global delivery, at Cognizant said that in the last two years the company has invested in expanding its geographic reach beyond the US and Europe by adding two new delivery centres in Mexico and the Philippines. “We will continue to focus on the North American market while expanding our geographic footprint to Europe, Asia-Pacific, the Middle East, and Latin America.”
In the quarter ended June, 77.8% of its revenue came from North America, Europe contributed 18.6% and Asia-Pacific, West Asia, and Latin America contributed 3.6%.
It will take time for any firm to diversify its revenue stream, said Gopalakrishnan. Infosys has a target of 40:40:20, he added—40% of revenue from the US, 40% from Europe and 20% from the rest of the world.
For the three months ended June, the US contributed 64.2% to its revenue, while Europe’s share was at 21.3%. To be sure, the contribution of countries outside North America and the Europe to Infosys’ revenues has increased from 9.9% in 2007-08 to 14.5% in the last quarter. “It takes time for a big ship to change course,” said Arvind Thakur, CEO of NIIT Technologies Ltd, a midsize information technology firm.
India’s largest IT services company Tata Consultancy Services Ltd (TCS) derived 56% of its revenue in the last quarter from the US.
Last week, brokerage BNP Paribas downgraded six IT stocks—Infosys, TCS, Wipro, HCL, MindTree and Persistent Systems—cutting their rating to “reduce” citing the outlook on the sector. “Our regression analysis of historical Indian IT services growth versus US GDP (gross domestic product) growth and a base effect variable suggests a fairly strong relationship,” BNP Paribas’ Abhiram Eleswarapu wrote in the report dated 18 August. “Therefore, over the next few quarters, not only should Indian IT growth slow due to a higher base from continued headcount dependence, but weaker macro data should only worsen the situation.”
Still, the US will continue to be the dominant market for these firms, said an expert.
Peter Bendor-Samuel, chief executive of a Everest Group, an outsourcing advisory, said that Indian companies focus on the US because that’s where the money is, especially the banking and finance sector, which is a big consumer of IT. “Even though companies are trying to expand into other markets in Asia, they will never be able to substitute the US or Europe.”