Indian IT services companies knew that the April-June quarter would be bad. The coronavirus outbreak had turned into a global pandemic and their key overseas markets were among the worst hit. Analysts predicted that for the first time, the sector would see year-on-year growth contract. Things would get worse before they go better, they added, and expected any recovery to be delayed until the fourth quarter of FY21 or even the beginning of FY22.
These dire predictions were not entirely off, as one IT firm after another reported a drop in revenues. However, a positive outlook, driven primarily by digital revenue projections, provided a silver lining.
Digital is clearly what the IT services firms think will drive growth, not just through the Covid-19 outbreak, but in the post-pandemic world as well.
How the big 4 fared in Q1
India’s second-largest IT firm, Infosys, which was clearly an outlier this quarter, saw revenue drop 0.3 percent y-o-y with $1.74 billion in deal wins. Even sequentially, the Bengaluru-headquartered company’s revenue decline was minimal at 2.3 percent, and much better than its peers. Infosys was first IT firm to reinstate its guidance, pegging it at 0-2 percent revenue growth for the year.
Like Infosys, HCL Technologies reported a 0.3 percent dip in y-o-y revenue at $2.35 billion. The company expects 1.5-2.5 percent revenue growth in FY21. However unlike Infosys, HCL Tech saw its sequential revenue drop 7.2 percent. The company said its deal pipeline surged 40 percent from the previous quarter.
Wipro’s revenue fell 5.7 percent y-o-y and the company did not share any guidance citing uncertainty around the recovery due to the pandemic. Like HCL Tech, it saw a sequential drop of 7.3 percent in revenue. Though Wipro did not share its deal-booking value, it said the pipeline was robust.
Digital to the rescue
The results were a mixed bag, but Digital revenue helped these companies overcome a difficult quarter on a positive note.
All the four IT firms commented that the majority of their deals had to do with digital transformation, as their clients would have no option but to adopt newer technologies at a much faster pace than before.
The definition of Digital differs from one firm to another, but largely refers to new-age technology services such as cloud, data and business analytics, leveraging artificial intelligence and machine learning.
C Vijayakumar, CEO, HCL Technologies, in a recent interaction with Moneycontrol, described technology adoption as something that would make or break businesses. In other words, companies would have to invest in technology to keep business alive.
Growing deal pipeline
A significant number of the large and small deals that have come IT firms’ way fell into the Digital bucket. In addition, the last quarter also saw an expanding partnership between IT firms and US tech giants such as IBM, Amazon Web Services and Google.
These partnerships are a significant development, and will involve Indian IT services firms and US tech majors collaborating to come up with solutions for clients. Vijayakumar pointed out that that these partnerships have helped the company understand newer possibilities on how technology can be leveraged.
Currently, these firms are ecosystem partners, wherein the Indian IT firms deploy the MNCs’ licensed technology along with their vertical-specific solution for clients. With the thrust on technology increasing, these companies are also witnessing a scaling up of their own products and platforms.
HCL Tech, for instance, saw product and platform services, which include its acquisition of IBM’s products for $1.8 billion, serving as a key growth driver, and surging 77 percent year-on-year for the quarter ended June.
In a recent conversation, V Ramakrishnan, CFO of TCS, said that the company’s products and platform, such as BaNCS, its banking solution, and Ignio, its cognitive automation solution, are gaining traction.
The line between Core and Digital is blurring
With digital gaining momentum, it is also blurring the line between core (legacy business such as maintenance and support) and Digital. Core continues to be a major revenue generator for Indian IT companies, but going by the recent quarterly results, Digital will be the engine driving their growth.
In the case of Infosys, Digital accounted for nearly half (45 percent) of revenue, rising 25 percent, whereas core revenue declined by 14 percent.
As digital revenues gain ground, it is unclear how core will be looked at from here on. “It is not a question if Core will replace or be bigger than Digital. It is being much more aligned to what our customers are looking for and make sure we have those capabilities to provide them the right services. That’s the approach,” said Salil Parekh, CEO, Infosys.
A Mumbai-based analyst said it might not make sense for IT companies to report Digital as a separate revenue stream. TCS has already stopped reporting Digital revenue (from October 2019), citing the difficulty it faced differentiating between Digital and Core revenue, and instead integrated both into services and solutions.
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