BUSINESS
A slowdown in growth in traditional IT verticals is giving a major fillip to non-linear business of Indian IT companies, which is now poised for a take-off.
A slowdown in growth in traditional IT verticals is giving a major fillip to non-linear business of Indian IT companies, which is now poised for a take-off.
On the forefront is Infosys, the number two IT company according to market capitalisation, which is looking to regain status of the IT sector bellwether.
Under its 3.0 five-year growth strategy, the company is looking to grow the share of its products, platforms and services (PPS) business to 30% of its total revenues from 6%, or about $380 million, now.
Bhuvnesh Singh and Vaibhav Dhasmana, analysts with Barclays Equity Research, in a report on Monday, said, “The Indian IT services industry has slowed from more than 30% annual growth in mid-2000s to mid-teens growth at present. In contrast, industry body Nasscom expects the non-linear business to grow six-fold to $12 billion by fiscal 2015. Thus non-linear business has reached its tipping point and IT services vendors are expected to take a big piece of this pie.”
Non-linear services include products, platforms and solutions, which generate revenues without any need to add headcount. This provides saving to clients and result in higher revenue productivity per employee and improved margins for IT firms. These services gained traction in the recent economic crisis as an win-win strategy for vendors and clients, who were looking to cut costs.
Experts said though Infy’s non-linear target looks ambitious, the recent Lodestone acquisition and similar buy may help boost the company’s revenues under this head in a big way.
An industry expert said, “Infy’s non-linear growth has been gradual and has undergone further stress due to the current IT environment and slowdown in discretionary spending. However, this does not mean that we should just write them off; after this slowdown passes by the next year, they should be on par with their peers. Their next acquisition is also expected to be non-linear like healthcare or BFSI on a PPS platform.”
The Barclays duo concurred.
“Infosys’ target pegs the growth rate at 39-58% annually, implying that the PPS strategy (non-linear approach) could be the single-most important growth driver for the company over the longer term. This would also set a low threshold for growth for the conventional IT services offering, allowing the company more flexibility to maintain and improve its margin profile.”
They said this strategy would address concerns over managing employee growth and help differentiate the company over the longer term.
Acquisitions could play a major role in the strategy, potentially improving returns on balance-sheet cash of about $4 billion, they said.
Pradeep Udhas, partner – advisory services and head – IT/BPO at consulting firm KPMG, said, “Infosys will be as selective this time round as they were for Lodestone. While it is one thing to acquire assets, it is another thing to integrate it with the original company. Thus, it will look at assets with more cutting-edge technology than just resources for IP. The next acquisition is likely to be in a new vertical.”
The company has already tasted success in products such as Airtel Money, Income Tax CPC and Platform BPO.
“We believe that initial success and nature of current client engagement provides Infosys with a head-start versus peers and lays a strong foundation for it to scale up its product and platform business in the future. This will no doubt provide an opportunity for strong returns,” said the Barclays analysts.
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