IT companies focus on new markets, sectors like recession

• TCS, Infosys, HCLTech, Wipro set to look beyond their traditional markets

• Inflation, cut in discretionary spending, saturation in current markets are impacting growth

New Delhi: India's top software services companies such as Tata Consultancy Services, Infosys, HCLTech and Wipro are on the lookout for new markets and sectors to support their growth plans amid concerns over high inflation, cut in discretionary spending and saturation in established markets. may have to do.

However, industry analysts say efforts to move into new segments could impact costs for these companies and impact their operating margins in the coming quarters.

In its September quarter results, TCS reported constant currency revenue growth of 15.4 per cent over a year ago. Asia Pacific, India, Middle East and Africa contributed 15% to its ₹55,309 crore revenue in the quarter, with India accounting for 5.1%. While India contributes marginally to the overall revenue, the country outpaced the revenue growth for TCS in Europe (including the UK) with a growth of 16.7%.

For Infosys, India accounted for 2.9% of its September quarter revenue of ₹36,538 crore. While the contribution remains small, it marked a growth of 36% from a year ago, the highest among all Infosys markets globally.

According to analysts, heavy reliance on US and Europe, which are currently facing market constraints from accumulation of factors, may force market diversification by Indian IT services firms.

Akshara Bassi, Research Analyst, Global Cloud and Server Markets at research firm Counterpoint India, said factors such as a drop in new orders in the September quarter could be clear indicators of weakness in developed markets. On Infosys, he said, "The company added 103 new customers during the quarter, down from 117 in the same quarter last year. This marks a decline of more than 10% in the number of new orders signed by the company in the quarter." This is a clear indication that there is weakness in the established markets, which may further impact the IT sector in the coming quarters."

Service providers also indicated plans to enter new markets. C. Vijayakumar, chief executive officer at HCLTech's earnings conference, said the company is expanding the number of facilities in India.

“We are regularly adding offices across India in several new and first-time markets, which we call ‘new vistas.’ We already have 25,000 employees working in these offices, and our placements in these markets The pace of hiring is at least 5-10% higher than the rate at which we are hiring in our established markets."

Infosys CEO Salil Parekh also said that the company is working on several digital transformation projects in India, as he emphasized on the growth of India's contribution to the company's revenue.

However, analysts emphasized greater emphasis on growth opportunities, which represent new areas for IT companies beyond traditional sectors.

Navin Mishra, Senior Director and Analyst, Gartner said, “The reason for diversifying into IT services is primarily to rebalance and rationalize our portfolio. Companies will invest more in offering digital services around cloud transformation and related areas, helping them better adapt to new market setups."

Jayant Kolla, co-founder and partner, technology consultancy firm Convergence Catalyst, said, “The banking, financial services and insurance (BFSI) sector has been an early adopter of digital transformation and cloud migration, so there will clearly be a change. For example, sectors such as healthcare and life sciences could be the biggest revenue growth drivers for IT services in the coming quarters, as these companies are adopting artificial intelligence and new technologies."

To be sure, companies are already looking for new areas in anticipation of saturation in more mature markets, and the results are already visible. For example, TCS' performance in the September quarter shows that BFSI, which is the top sector-wise contributor to its revenues, saw the slowest growth pace (13.1 per cent over a year ago) across all sectors. In comparison, others such as life sciences (14.5%), technical services (15.9%), and communications and media (18.7%) grew at a faster rate.

For Infosys, the manufacturing sector (45%), as well as energy and utilities, (24.3%) grew faster than financial services, which registered a growth of 11.5% in the September quarter.

Omkar Tanksale, senior research analyst at broking and investment firm Axis Securities, said diversification from established sectors could be an important avenue for these companies. “BFSI being a lending-heavy sector, will be the first sector to exercise caution and cut spending due to concerns around inflation. Similarly, for the retail sector, the fall in consumer demand will be directly related to the decline in spending on services by companies in the sector."

This, in turn, could also impact the operating margins of top IT services companies. “There will be costs associated with upskilling and diversifying into new areas, including hiring new individuals, or paying more for existing employees. While the IT sector may continue to grow at 8-10% till FY13, this additional cost is likely to impact operating margins, which have already been hit in the September quarter,” said Mishra.