Home >Opinion >Online-views >2014, the year in review | Silver linings in the cloud for technology sector

The year 2014 was uneventful for most mid-cap and large Indian information technology (IT) services providers since many of them were recovering from their sluggish performance in 2013, resulting in muted sales and profit growth.

The year 2015 may not provide much respite either, since revenue from the retail, banking and financial services sectors is likely to remain under pressure. Coupled with the depreciation of most currencies against the dollar, it is expected to further impact revenue growth and impact margins.

India’s largest IT services provider, Tata Consultancy Services Ltd (TCS), which displayed a mixed performance in 2014, has already cautioned about weak December quarter sales since it coincides with the holiday season and is typically a weak quarter for IT firms.

The other IT services providers are no exception to this rule since over 80% of their revenue comes from the US and Europe.

In an October note, analysts at Kotak Institutional Equities pointed out to their clients, “Infosys Ltd started off the year on a weak note due to the weakness in retail vertical and staffing challenges. TCS cut guidance due to a soft insurance vertical and lower-than-expected pace of ramp-up in the retail vertical. HCLT’s (HCL Technologies Ltd’s) revenue growth rate slowed due to a longer transition time for complex projects."

Nasdaq-listed Cognizant Technology Solutions Corp., which has most of its workforce based out of India, might have appeared to be an exception since the company raised its full-year revenue forecast in the September quarter, boosted by a higher demand for its healthcare and financial services. But one may recall that Cognizant had disappointed investors by cutting its full-year revenue growth prediction citing client-specific challenges in the June quarter.

The year 2014, though, did prove to be a watershed year for India’s second largest IT services provider, Infosys, which named SAP AG global product head Vishal Sikka as its first non-founder chief executive in 33 years in June, ending uncertainty over the company’s succession planning.

The move at Infosys also paved the way for the exit of all of the company’s founders, including N.R. Narayana Murthy.

Since taking charge on 1 August, Sikka has managed to keep investors excited with his “New+Renew" theme, even as the company is exploiting its latent strengths in training and talent to catapult it back to industry leadership, according to a 5 December note by CLSA analysts.

On 8 December, though, families of four co-founders of Infosys sold 2.8% of the shares outstanding of the company for about 6,484 crore, according to a report by Deutsche Equities India Pvt. Ltd. The sellers were Murthy, Nandan Nilekani, K. Dinesh and the wife of co-founder S.D. Shibulal, raising concerns of corporate governance despite written assurances by Murthy and Sikka that such was not the case.

Seen in a different light, the move underscores Sikka’s increasing control over the company’s future where the founders still figure among the major shareholders, though these are still early days to predict whether Infosys has successfully handed over the baton.

Infosys and Wipro Ltd continue to be growing in single-digits, while TCS and HCL Technologies remain leaders on that count among the top-tier firms. But all IT firms will have to be content with increasing cross-currency impact in 2015.

There are some silver linings in the cloud, though.

For one, despite the fact that Indian IT services providers still earn a major part of their revenue from traditional businesses such as application development and maintenance, and infrastructure management, they have begun clubbing social media, mobility, analytics and cloud (SMAC) technologies, and Internet of Things (IoT) applications with traditional solutions to provide clients more value and stay relevant in a digital age.

According to lobby Nasscom, SMAC currently contributes to only about 10% of overall revenue for software services companies, but is a fast-growing market. In a 28 July report, TCS forecast that digital spending by companies globally would touch $113 million in 2014.

Based on research firm Gartner Inc.’s data on revenue market-shares, the top five Indian vendors—TCS, Infosys, HCL Tech, Wipro and Cognizant—improved their market share by 1.6% from 2009 to 2013, compared with the top 25 global vendors who lost 1.4% revenue market share.

To stay in the race, Indian IT firms will have to integrate SMAC and IoT technologies in their services models.

The trend of migration to the cloud has investors worried about the cannibalization of the existing services of Indian vendors, according to a 10 December note by Banco Espírito Santo de Investimento (BESI) Research.

The analysts, however, say, “Moving existing legacy applications to the cloud involves transition risks, which are better understood and mitigated by existing vendors who manage these applications."

Going by the same logic, Indian IT firms have begun partnering with technology start-ups, and even acquiring some, to fill in these niche technology gaps and provide clients with value-added services.

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