Opinion | India consolidates its position in outsourcing business

India’s share of the global sourcing market was 52 percent in fiscal 2017, says a report from Edelweiss. The country remains the largest player in this market although the rate of growth has been slowing down. That could be a cause for concern, but projections are optimistic.

This confidence is buttressed by Nasscom estimates. In a presentation, IT-BPM Industry in India: Sustaining Growth and Investing for the Future, released on June 22, 2017,  the software industry association puts India’s BPO exports at $116 billion. Moreover, as Nasscom was quick to point out, its significance to India can be better appreciated if one realises that these revenues were equivalent to almost 20 percent of this country’s forex reserves as of January 27, 2017. (Currently, they are almost 30 percent of forex reserves) They also represent almost 7 percent of total FDI inflows

Determined to keep India's lead, Nasscom hopes to re-skill anywhere between 1.5-2 million of its workforce over the next 4-5 years.

For Nasscom, the growth drivers are quite obvious. It is aware that the industry added $11 billion in revenues during 2017-18.  That was a growth of 8.5 percent in constant currency and 7.6 percent in reported currency. Digital has now become mainstream and is today the key differentiator for the industry.

That is why the industry has been focussing on the skills that will be needed for this transition from conventional solutions to digital offerings.  It is also gearing itself up for the new and emerging business models that the industry wants to embrace.

In order to ensure that US immigration rules do not blunt the growth of this industry, it has already begun seeking new markets in Continental Europe, Japan, China and Africa. It has also accelerated the process of acquisitions and partnerships to enhance its digital capabilities, domain and consulting skills.

But there are headwinds. There is the issue of currency volatility which led to an almost 1 percentage point difference between constant currency and reported currency growth. Then there is the longer gestation period factor, for enhanced R&D investments for products and platforms which also impacts margins.

Still, analysts at Edelweiss are bullish. They believe things could not have been better for this sector and these could be the best phases in the past decade. Its analysts are reassured by the manner in which the Indian industry has been able to adapt its businesses to the changing market landscape. That, in turn, has allowed it to cope quite well with the tough conditions and keep earnings and business performance modest.

These analysts maintain that the US landscape is ‘the best in a decade’ with a rise in spends and pricing. The shift towards digital is invigorating the broader IT services landscape. Indian IT companies have been able to get their digital offerings off the ground, yet have enough headroom to sustain high growth rates for a fairly long time, which adds to the potential.

At the same time, Indian companies are becoming both finance and market savvy. They have begun to engage in better capital management (finally beginning to use cash surpluses to buy back shares) says Edelweiss. This will add to earnings providing the missing fillip to IT companies’ return ratios.

The author is consulting editor with moneycontrol.com.