Healthcare for derisking

Is healthcare the new sunshine sector for Indian information technology (IT) services industry?

The question follows talk about Infosys’s plans to acquire such a business.

Analysts say potential technology spend by the healthcare industry, especially in the US, offers the Indian IT firms a viable opportunity to de-risk their sector exposure considering it relies a lot on banking, financial services and insurance (BFSI) industry.

This is particularly true in the context of the US government’s healthcare model that recently underwent some changes under president Barack Obama.

As per the new plan, around 35 million uninsured Americans are proposed to be brought under the government’s healthcare scheme by 2014.

“The sector has been largely untapped till now. The focus has always been mainly on the banking segment,” said Chaitanya Ramalingegowda, director, Zinnov, a technology consultancy.    

"However, since performance of the BFSI sector is directly proportionate to the macro economic environment, the risk is generally high,” he said.

Also, with fear of economic slowdown looming large, companies in India do not want to depend too much on this vertical, he added.

“Though it will be wrong to say that healthcare sector is immune to macro economic environment, the volatility is a lot less when compared to BFSI,” Sid Pai, managing director at outsourcing consultancy TPI. “The last few years has seen significant positive changes happening in this sector, so there is definitely a huge potential.”

For Cognizant, the segment’s contribution to its overall revenue stands at 26%, which is way ahead when compared to its peers. For Wipro, healthcare contributes 10% to its revenue while for TCS the figure stands at 6%. Even for HCL Technologies, their healthcare practice is one of the fastest growing business verticals for the company.

Infosys, the second largest IT firm in the country, has to cover a lot of ground if it does not wish to miss the bus.

Healthcare contributes a minimal 1.1% towards the company’s revenue. The acquisition, if it happens, will take the contribution to 8%. In fact, many believe that with Cognizant reaping benefits of investing early in this sector, others want to follow suit as everyone wants a share of the pie. Though Cognizant is mainly in the health insurance space, TCS and Wipro have a presence in the health provider space as well.

“In the last six months, healthcare has been identified as one of the verticals for the next level of growth for Wipro. The government there has also asked insurance companies to increase the insurance cover of individuals. So overall, the time has come to invest in this segment,” said Mohd Haque, vice president & vertical head for payers and providers at Wipro.

Govind Agarwal, Arshad Perwez and Atul Agarwal , analysts from JM Financial, in a note last week said there is every reason to believe that Infosys will go ahead with the acquisition.

“The move opens a new market for the company and the EBIT margins of the target company is also within range,” JM analysts wrote. “Also, Infosys has enough cash balance to fund the acquisition.”

Many feel the time is ripe to bridge the technology gap in this sector and bring it on par with BFSI and retail.

Further, the US centre for medicare and medicaid services has mandated that the coding system for billing medical procedures move from the WHO international classification of diseases ICD-9 to ICD-10 by end of 2013, often regarded as the Y2K for this sector.

This reform in the US has been one of the most opportunistic business areas that Indian IT services industry can look forward to. “Insurance companies want to get efficient and make the overall process less costly. Technology will only help achieve this goal,” said an analyst on condition of anonymity.