Photo: Mint
Photo: Mint

Top Indian IT firms pip multinational rivals in incremental revenues

Over the past 4 years, TCS and Cognizant Technology Solutions Corp. have seen incremental revenues grow faster than IBM or Capgemini

Bangalore: After spending the better part of the last decade lagging behind multinational rivals such as International Business Machines Corp. (IBM) and Accenture Plc. in terms of winning large outsourcing deals, top Indian software companies are now starting to outpace them.

Over the past four years, the likes of Tata Consultancy Services Ltd (TCS) and Cognizant Technology Solutions Corp. have added incremental revenues at a much faster clip than IBM or Capgemini SA, Mint’s analysis shows. This happened as Indian firms began competing aggressively for more high-margin consulting deals, shedding their dependence on traditional low-cost commoditized businesses to build strengths in more specialized and lucrative tasks.

The results began to show.

TCS, India’s largest software services firm, posted $6.89 billion (around 43,000 crore today) of incremental revenue in the previous four calendar years, followed closely by Cognizant at $5.56 billion, according to figures compiled from the companies’ annual reports.

In that period, Capgemini generated €1.72 billion (around 14,620 crore today) and IBM posted global services incremental revenue of $1.38 billion, with annual revenues declining in the last two years.

Accenture made $7.76 billion, but that figure was buoyed mainly by the $4.32 billion it generated in 2011. Bar

Incremental revenue, which denotes the actual revenue gained by a company over a given period of time, is a measure of market share growth and has evolved as a truer benchmark for the information technology (IT) sector with profit margins eroding as firms push to win deals.

“For the bulk of projects what is happening is that clients are saying, we need to get the Indian players in as well, along with the global giants. It’s not an issue for discussion anymore," said Partha Iyengar, vice-president and head of research, Gartner India, in a recent interview. “Five years ago, we said we’ll stop talking about the offshore model. It’ll just become traditional sourcing—that has happened this year." Even Infosys Ltd and Wipro Ltd, which have lagged other top-tier Indian rivals over the last four years, have added more incremental revenue than IBM and Capgemini. Between 2010-2013, Infosys added $3.47 billion in incremental revenue, and Wipro $2.21 billion.

“TCS is now adding more incremental revenues on an annual basis than Accenture," JPMorgan India analysts Viju George and Amit Sharma said in a recent note. “Likewise, it is now also adding more incremental gross profits than Accenture annually. (The last and perhaps only time this happened was during the Financial Crisis in 08/09 when Accenture was impacted far more seriously than TCS, so we treat that occurrence as an exception.)" For IBM, the previous four years have not been very kind. Over the past five years, Big Blue—as it is popularly known —has struggled to grow revenues, especially in its core services business, and the December quarter marked its seventh straight quarterly sales decline.

The 102-year-old company has struggled to hold on to large traditional outsourcing contracts from customers such as British Petroleum (BP) and Wellpoint Inc. It has now adopted a strategy of getting rid of low-end commoditized businesses while increasing investments towards developing high-margin technologies such as cloud computing and analytics. “Indian IT firms are not only able to offer more cost-effective services but also offer better quality," said Peter Schumacher, founder of Germany-based Value Leadership Group that advises companies on their European strategy.

“The offshore firms are very hungry for business, while many incumbents remain strategically asleep. Buyers see the offshore firms as being much more flexible to do business with," he said.

Another area where TCS has gained over the likes of Accenture is in sales, general and administrative expenses.

“Accenture’s SG&A allocated per unit volume of work (or per employee) is over twice that of TCS. Accenture counts over 5,500 senior executives (many of whom may be MDs/partners), and we estimate the annual pay of this collective senior management force at $1.5-2 billion (including stock options/units); much of this expense is presumably wedged in the SG&A head—TCS does not have a partner-led sales model (not nearly to the extent that Accenture has it)," JPMorgan India said in its report.

TCS’s share of the global outsourcing market nearly doubled from 3.9% in the first quarter of 2009 to 7.6% in the final three months of 2013, while IBM’s global services share declined from 35.9% to 32.4%, according to figures provided by outsourcing advisory firm HfS Research.

Cognizant’s share more than doubled from 2% to 5.2% in that period, while Capgemini’s declined from 8.4% to 7.7%. Cognizant is headquartered in the US but has most of its 171,400 employees in India. Global IT spending is expected to touch $3.8 trillion in 2014, according to technology researcher Gartner.

“I think we compete very effectively against Accenture today; Accenture is one of our biggest competitors," Karen McLoughlin, chief financial officer of Cognizant, said in an interview in February. “Accenture and TCS are two firms we see very frequently during client transactions. IBM is also a very big competitor. But the difference is that they don’t necessarily stay in the same type of transactions that we do," McLoughlin said.

IBM and Accenture did not respond to emailed questionnaires. TCS CEO N. Chandrasekaran in a recent interview, when asked about sustainability of current growth in incremental revenues, had said, “In terms of opportunities (for future growth) it will be across the board—every industry will get transformed. Digital alone will be a $3-$5 billion opportunity for TCS."