R&D spends of Indian IT majors on a decline | Mint

R&D spends of Indian IT majors on a decline

The $245 bn IT services industry in India is witnessing diminishing profitability.  (Bloomberg)
The $245 bn IT services industry in India is witnessing diminishing profitability. (Bloomberg)

Summary

  • Lower R&D spending underscores the challenges faced by tech leaders

Bengaluru: India’s top five information technology services firms have reduced research and development (R&D) expenses as a percentage of their revenue in the past five years. Experts said this move is driven by a strategic effort to trim discretionary spending and bolster profitability.

In FY23, Tata Consultancy Services Ltd, Wipro Ltd, and Tech Mahindra allocated less than 0.5% of their revenue to innovation, while Infosys Ltd and HCL Technologies Ltd spent 0.71% and 0.54% of their revenue on innovation, respectively.

The IT giants’ modest R&D investment is in stark contrast to Accenture Plc, which allocated around 2% of its revenue, totalling $1.3 billion, for research and development in 2023. In fact, Accenture’s 10,700 crore R&D expenses were more than four times the cumulative innovation spending of the five companies in the last five years, totalling 2,361 crore, according to a Mint analysis.

“Organisations worldwide continued to face a slowdown through multiple macroeconomic headwinds and challenges such as inflation, recessionary fears, global conflict, and supply chain disruptions assaulting their strategic goals," Tom Reuner, managing director at IT outsourcing advisory, HFS Research, said. “They are also in a big hurry to drive innovation to respond to challenges and stay relevant. With that, discretionary spending came under continuous scrutiny."

Lower R&D spending by the five companies underscores the challenges faced by Indian technology leaders to promote newer business services, including generative artificial intelligence (AI) tools, to Fortune 1000 companies.

The $245 billion IT services industry in India is witnessing diminishing profitability as traditional tasks such as application development and infrastructure maintenance are being commoditized. Predictably, profitability of the firms has decreased over five years, while Accenture marginally improved its operating margin.

Accenture has reported a 62% jump in revenue since 1 September 2018 to $64.11 billion in the year ended August 2023. Its R&D spending rose 63% during this time.

From 1 April 2018, to March 31 2023, TCS, Wipro, and Tech Mahindra’s revenues grew 46%, 41.3%, and 38.5%, respectively. During this period, TCS and Wipro witnessed a rise in R&D expenses by 28% and 21%, respectively, while Tech Mahindra’s R&D spending fell 59%. Infosys and HCL Technologies, saw their revenue rise 66% and 60.6%, respectively.

 

HCL Technology’s R&D spending was at 141 crore in the year ended 31 March 2018, rising by 1.54% the following year. But since then, spending on innovation has been gradually declining, like its peers.

There is an overall decline in R&D spending as financial cost controls are in place, said Ray Wang, principal analyst and founder, Constellation Research Inc. This will lead to less original Intellectual Property and will hurt their operating margins, Wang added.

Tech Mahindra, which ended with $6.6 billion in revenue last year, spent only 18 crore or 0.03% of its revenue. Its operating margin fell to 4.7% as of 30 September.

Emails sent to TCS, Infosys, HCL Tech, Wipro, and Tech Mahindra for comments remained unanswered till press time.

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