Bangalore: Top-tier Indian software exporters such as Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd and Satyam Computer Services Ltd plan to be selective in choosing deals in the domestic market to protect their overall profit margins.
Traditionally, Indian vendors, with the exception of TCS, Wipro Ltd and HCL Infosystems Ltd, have largely stayed away from domestic market and focused on the US to take advantage of higher billing rates and lower costs of delivering services from locations in India.
Stepping up: The Infosys campus in Bangalore. The company has formed a separate business unit to pursue deals in the domestic market and plans to offer software solutions and systems integration services. (Photo: Madhu Kapparath/Mint)
In recent quarters, though, vendors such as Infosys and Satyam have stepped up their focus on the Indian market where customers are increasing their investments on deploying technology to fight competition, offer better services and cut costs.
India is the world’s fastest growing market for tech products and services.
“We are selective about the deals that we want to focus on,” said S. Venkataramani, head of the domestic business at TCS, which reorganized its business units recently. With a separate profit and loss account for the domestic business, there’s now a sharp focus on margins and profitability, he said.
TCS expects demand for services and solutions from customers such as utilities, infrastructure and government. “About 70% of our offerings in India are largely services, but by default we have to deliver equipment as customers expect us to provide complete offerings,” Venkatramani said, adding, “Equipment always dilutes margins.”
The domestic business accounts for 10% of TCS’ total revenues and the firm expects to increase it by two-three percentage points over the next 18-24 months. TCS has net profit margins of 18-20% from its India business, while operating margins have been around 40%.
Technology researcher Gartner Inc. forecasts that the Indian IT services market will grow at a compounded annual rate of 23.2% to $10.7 billion (Rs42,907 crore) by 2011, up from $3.7 billion in 2006. Large contracts in India in the recent past include deals such as a $600 million contract between phone firm Vodafone Essar Ltd and the Indian unit of International?Business?Machines Corp.
Sabyasachi Satyaprasad, research director at advisory firm neoIT, said Indian firms need to invest significantly in building scale and capabilities to address the Indian market.
“You have to take the right deals, run it tight and make them work to get better margins,” V. Balakrishnan, chief financial officer, Infosys, had told Mint earlier. The firm has formed a separate business unit to pursue deals in the domestic market and plans to offer software solutions and systems integration services partnering hardware vendors.
Like its larger peers, Satyam, too, plans to stay focused on select services deals in the domestic market that contribute to profit margins. “Though the margins are not as lucrative as with the US market, the domestic business helps in skill building initiatives and improving margins,” said Virender Aggarwal, director and senior vice-president at Satyam, declining India profitability numbers for his firm. India accounted for around 4% of Satyam’s global revenues of Rs2,195 crore for the December quarter.
Wipro Infotech, the India, West Asia and Asia-Pacific business of Wipro Ltd, which has a higher exposure to hardware business, had operating margins of 9% for the December quarter, during when it had gross revenues of Rs972 crore.