IT's going to be infra management, BPO show all the way

Take it from technology heavyweights like TCS and HCL Technologies, which have proved that infrastructure management services (IMS), increase in talent utilisation, moderation in hiring and consistent volume growth propelled by smaller deals from continental Europe stand out as the key differentiators that have contributed to their stellar performance in the last four quarters.

Madhu Babu of HDFC Securities, in a note last week, said, “Among the service lines, IMS has emerged as the key growth driver across the sector. Infosys’ IMS revenues were up 21.8% yoy in FY13 (vs the company’s dollar revenue growth rate of 5.8% yoy). Similarly, TCS and Wipro have also reported an IMS revenue growth of 30% and 12.3% yoy, respectively, for FY13, ahead of their overall growth rates. HCL Tech, which derives ~30% of revenues from IMS as of Q3 FY13, has grown IMS revenues (TTM) by 28% yoy.”

She said further: “Considering the under-penetration in this service line and strong opportunities emanating from the rebid market, we believe that Indian vendors would continue to generate robust growth in IMS over the next two years.”

But, within the non-linear vertical, she believes the platform, products and services business (PPS) is still at a nascent stage, growing a feeble 4.7% in 2012-13. Infosys, which has set aside $100 million for its PPS business, may be a different story, which is still banking on growth from this vertical while Cognizant has earmarked $500 million towards social, mobility, analytics and cloud initiatives.

BPO is also turning out to be a promising growth driver for these technology players. Infosys BPO notched up a revenue growth of 29% on-year in FY13 (vs company growth of 5.8%). TCS has also shown a strong traction in BPO, with revenues up by 28% yoy in 2012-13 (against company growth of 13.7%).

Since discretionary spend and traditional outsourcing demand continue to be in the sick bay, Partha Iyengar, vice-president and distinguished analyst at Gartner, believes it’s high time IT giants shifted focus to India where domestic IT spend is growing faster. Indeed, Nasscom has put out a 12-14% guidance for global IT exports as against 13-15% for the domestic sector.

But worrylines remain. And these could be the BFSI and telecom vertical, slowdown in hiring, pricing pressure, lower wage hikes, moderating incremental revenue share and visa fears surrounding the US Immigration Bill.

Analysts are not too optimistic, and have predicted wage hikes of 2-3% for onsite employees and 6-8% for offshore staffers for 2013-14 – similar to or less than that of last year.

Rumit Duggar of Religare bats for patience. “Macro recovery and related spend push in global markets will aid volume growth. Pricing pressure in the bottom-end service lines like application, maintenance and application development may continue as long as operating costs increase and companies continue to eat into each other’s business. Hiring will continue to see a slowdown as projects have become short-term, and so project-based hiring will become the norm. However, once industry growth returns to 15-20%, all these concerns will evaporate.”