Home market gets attractive for India's IT giants
It's a curious thing. India’s IT companies have historically ignored the domestic market.
These are among a growing cohort of deals that represent a subtle shift in the focus of India’s largely export oriented, $180 billion IT services industry — the domestic market.
India’s IT companies have historically viewed the domestic market as more trouble than it is worth. The margins and deal sizes are lower, the haggling interminable, and the time taken to close a deal is long. Compared with North American clients who spend big, make decisions quickly and are focused more on quality than price, it needs a different kind of orientation to sell in India. Things are beginning to change.
With India becoming a sizeable economy with the stated ambition of becoming a $5 trillion economy in half a decade, combined with the fact that nearly every company needs digital services irrespective of its sector or size, Indian IT is taking a relook at its approach towards the domestic market.
Another big source of demand is multinational companies that do business in India. As a consequence, the share of Indian revenues for India’s IT behemoths is set to rise, too. “If India is to become a $5 trillion economy in five years, technology will be a significant part of that,” says CP Gurnani, chief executive and managing director of Tech Mahindra. Rival Cognizant, which has 80 clients in India, says it is now seeing among its clients in India a greater desire to compete globally and a more sophisticated approach to digital.
“Cognizant’s clients here include Indian companies that are defining global benchmarks as well as multinational companies for whom India is a fast-growing market. Cognizant is digitally transforming the business as well as operating and technology models of these clients, enabling them to drive higher levels of efficiencies,” says Ramkumar Ramamoorthy, who took over as chairman and managing director at Cognizant India in September.
The factors that made India a relatively unattractive market have been deal sizes, margins and time taken to close deals. Things have steadily improved on these counts. Time taken to close deals is down from 18-24 months to 3-12 months now, says Sangeeta Gupta, senior VP at IT industry body Nasscom. “The government is a big buyer, accounting for almost a fourth of local contracts. Enterprises across segments — from banking to manufacturing, telecom to oil & gas — are deploying tech solutions, often leapfrogging to digital transformation, making India attractive,” she adds.
While the big bucks and business is still outside India — with the US market comprising the largest share of it — the Indian business, which used to be small even among Asian markets, has now begun to offer contracts that are hard to ignore. And it is not just mega government projects such as Passport Seva or GSTN Network, but also smaller companies going digital, increasing spends on technology services.
“We are seeing a shift from traditional mindset, from cost-focussed to efficiency-focussed,” says DD Mishra, senior director at technology forecaster Gartner. So if earlier the shift to IT was dictated by the basic need to use technology (like banks installing computers), now companies want specific outcomes such as time saved for transactions, enabling users to multitask and so on (for example: shifts from internet-based to appbased banking).
India’s IT sector is worth $180 billion, of which domestic business is $45 billion, roughly equally divided between services, software products and hardware. The biggest margins are in services such as software implementation, enhancements involving artificial intelligence (AI) and machine learning (ML), and so on. According to Gartner, the domestic tech services business grew 9.8% in 2019 over 2018. The growth rate is faster compared with global services, which is around 8%. India is also highly underpenetrated. For instance, less than 5 million out of the 40 million small and medium businesses (SMBs) are online, offering plenty of headroom for growth. Demand is growing for a gamut of services — from basic hosting and cloudbased solutions for companies yet to benefit from tech to upgrades for others looking to build new efficiencies. Many companies that never used enterprise tech are now leapfrogging to advanced cloud-based services and analytics.
Financial services companies are investing hugely in digital platforms and services —apart from the 2,000 fintech startups that want to sell everything from insurance, loans and mutual funds via apps, traditional banks are also upgrading to deliver services digitally. In fact, among banks the focus is shifting from core banking to data-driven solutions, powered by AI/ML. Among manufacturing companies, the shift is from ERP or business planning software to internet of things (IoT), analytics, big data and cloud services.
Sample the action in domestic tech services contracts. In 2018, Tech Mahindra signed a Rs 270 crore, five-year deal to enable digital transformation of Coal India. It also bagged its biggest defence order (Rs 300 crore) from India Navy to implement RFID (radio frequency identification)-based access control systems across all naval bases and ships. Infosys bagged a Rs 4,242 crore contract to develop a next-generation income tax filing system. This will cut down processing time to file returns to one day from 63 days at present and expedite refunds. TCS is helping Voltas implement industrial IoT to improve customer service operations.
FRESH DOMESTIC DEALS
Some recent projects that IT services players are delivering
Such contracts are increasing across government departments and India Inc as all are seeking smart tools to be future-ready. For instance, after Passport Seva was implemented, the time taken to issue passports dropped from six months to two weeks.
At advanced analytics firm SAS India, the share of domestic business has jumped from 10% of the total to 30% now. Cognizant reports India revenues as part of “rest of the world” (includes West Asia, Asean, New Zealand, Japan and Australia), which hit a revenue run rate of over $1 billion in the June quarter. It does not report India revenue separately but says it has 80 customers here. Tech Mahindra says India business has grown 25% Y-on-Y. “India accounts for 5% of our total business. We aim to double this in the next few years on the back of growing IT spends by customers,” says Sujit Baksi, president, corporate affairs and India business, Tech Mahindra.
For TCS, India business grew 15.9% y-o-y in Q1 of 2019. In 2018-19, TCS’ India business was 5.7% of total. India’s largest services player said in its 2019 annual report emerging markets like India will see enterprises leapfrog into the digital era and start spending. Infosys and Wipro reported India business at 2.5% and 5.29%, respectively.
There is a gradual shift being seen in India from tentative pilot projects to actual implementation, says Prativa Mohapatra, vice-president, sales, IBM India/South Asia. “For the last couple of years, many organisations were engaged in pilot projects to experiment with new technologies — like moving simple workloads to cloud, building chatbots to experience AI and small mobile apps to go digital. Playing in the periphery and not taking bold technology leaps have not been beneficial for these organisations. Now there is a shift.” Mohapatra compares this shift as moving from chapter 1 to 2. While chapter 1 was more outside-in approaches with random acts of going digital, chapter 2 is about moving from experimentation to true transformation, gaining speed and scale.
Pilots are now becoming actual implementation projects as the debate has shifted from what technology can do for us to ensure productivity gains. For example, the Central Board of Direct Taxes has for long conducted pilots on faceless e-assessment of I-T returns. Live implementation will finally start on October 8. This will be done using a combination of AI, ML, analytics and so on.
Within the India spending, experts say, the spending on newer technologies is remarkable. “Digitisation has led to higher IT transformation spends across government and private sectors,” says Megha Chawla, a partner at Bain & Company. While banking, retail and e-commerce have led the wave given the critical need for adaptable systems, companies in more traditional sectors are also undertaking transformation plays.
The crop of emerging global digital companies are investing in technology in India. TikTok owner ByteDance plans to invest $1 billion in India in technology hardware and services. Boloro Global, a US-based security company, interestingly sees a bigger market for its products and services in India than in the US. State-run Bharat Sanchar Nigam is its first customer in India and it hosts the service using Amazon Web Services. Karl Peter Kilb III, CEO, Boloro Global, says, “Boloro is a US company that is seeing its greatest immediate opportunity outside the US.” He elaborates that America is still a credit card-based society and the rest of the world is leapfrogging from being dependent on cash to the mobile and digital platforms, skipping the credit card mindset. “You have a situation where there is such a concentration of mobiles in markets like India, which makes it better for fraudsters to attack. When you see a market that wants to replace cash, wants to be digital, wants to promote transparency and financial inclusion, that is an ideal market for us to push.”
While the market looks promising now, billing rates continue to be lower in India, “often 50% lower than international markets,” says Chawla of Bain & Company. Margins are also lower (more like 12-16% in India compared with 21-26% in US/Europe). So “India will be significant to companies that can build lean cost structures or cross-subsidise through international markets,” adds Chawla. Time taken to close contracts has improved across India Inc, but for the government business, it still takes long — often more than a year. And the current environment is not really helping accelerate things. Indications of macroeconomic slowdown in several sectors, including banking, telco, automotive and realty, could lead to spending constraints. “The irony of the situation is that clients need to transform to get back to growth but are constrained by the spend restrictions in face of these economic indicators,” says IBM’s Mohapatra.
For India to be able to reach the $5 trillion economy target by 2024, these difficulties will need to be negotiated.