IP-strong IT firms rake in discretionary spends

Slowly but surely, analysts are discerning a silver lining around the cloud of disappointing quarterly results of most IT firms. And that is, more and more corporates and institutions are increasing allocation for enterprise solutions in their IT spends, as borne out by the numbers of firms such as Oracle, Infosys, HCLT, Wipro, IBM and SAP.

IBM’s latest results indicate that rather than just going in for disruptive pricing, it is sharpening focus on adding value to its offerings by incorporating more patented software (products deemed intellectual property or IP).

SAP’s results last Thursday prompted Bhuvnesh Singh and Vaibhav Dhasmana, analysts at Barclays Research, to observe that the numbers do not “provide any incremental risk to enterprise spending trends in IT in CY13”, although the firm’s 2013 guidance of 11-13% on-year revenue growth is similar to its 13% growth last year, reflecting the current economic uncertainty.

“This should be viewed in conjunction with the recent commentary from Indian IT vendors where they have indicated a pick-up in discretionary spend,” the duo wrote.

While TCS derives 15% of its business from enterprise solutions, the corresponding figure is 20% for HCLT, 27% for Infosys and 30% for Wipro.

SAP has now overtaken rival Oracle in terms of cloud and mobility revenues, and is banking on increasing use of SAP platform among top Indian IT players to meet its CY13 guidance.

There are no short-term rewards for embracing SAP though. Long-standing enterprise clients have curbed spending for the past two years. But Indian IT firms are aware that investing in non-linear initiatives is a sensible thing to do now, given that corporate spends on enterprise solutions are expected to be huge in the US.

Rumit Dugar, vice-president of institutional research at Religare, said, the worst is over and discretionary spend, largely on the corporate technology side, is expected to pick up in the next 12-15 months.

“We believe large caps are better positioned to capatalise on incremental cyclical corporate growth, with macro tail risks like the US ‘fiscal cliff’ also expected to recede in the next six months. For midcaps, too, improvement and sustained tech spend, will be key to FY14 growth,” said Dugar.

Research firm Gartner has also predicted a 4.2% on-year increase in IT services spend to $3.7 trillion in 2013. But next-generation IT services will be led by IP-centric growth.

Agreed Ray Wang, principal analyst and CEO of Constellation Research. He said the abundance of disruptive technologies in cloud, mobile, social and big data presents tremendous opportunities for Indian IT firms.

However, while leading Indian IT firms progress toward non-linear growth, it is critical that they partner with mega software vendors such as Oracle, SAP, Microsoft and IBM to drive the partner model, he said. “This is because in the near future, such vendors may encroach upon the IT services space via acquisitions, leaving a number of their valued partners in the lurch.”

Thus, IT services firms that invest in IP-based offerings will experience accelerated growth in the next 24-36 months, he said.

Pralay Das, analyst at Elara Capital, said, “This poses a challenge to Indian vendors who plan to use IP as a means to maintaining current price levels. For, they have to stack up against the IBMs of the world who are already implementing this stratagem successfully.”