The share of digital services in the export revenue of Indian information technology (IT) service companies are expected to double to around 30 per cent by 2020, says rating agency and research firm CRISIL.
This will be supported by initiatives like large-scale reskilling of the tech workforce and more of mergers and acquisitions (M&A) in the digital space.
'Digital' encompasses newer technologies such as Big Data and Analytics, Internet of Things, Artificial Intelligence, machine learning, Robotic Process Automation, Augmented Reality and Virtual Reality. Which organisations are seen increasingly embracing as they digitalise their operations, migrating to a cloud and smartphone environment.
The share of digital services revenue in India's IT export is currently around 15 per cent, with the late entry by domestic firms to this segment. However, the segment also grew a little more than 25 per cent in FY17 as Indian IT firms won digital deals, backed by re-skilling of employees. This trend is set to accelerate.
According to CRISIL, the digital services portfolio of Indian IT export have been growing at a healthy annual 30-35 per cent, though traditional services are still the bulk of the $140-billion industry and growing two-three per cent annually. Overall, IT revenue growth is expected to be around eight per cent a year until FY20, the report said.
"The share of digital services in new global outsourcing contracts is estimated to have doubled to around 40 per cent in fiscal 2017 from three years before and will drive revenue growth," said Anuj Sethi, senior director at CRISIL. "For major IT players based outside India, more than a third of revenue already comes from digital services."
Beside in-house digital skill building, IT firms are likely to undertake more acquisitions that will accelerate revenue growth from the segment. In FY17, 64 M&As were reported in Indian IT digital space, as compared to 39 in FY14.
"We foresee an increase in moderate-sized acquisitions in the digital space by both tier-I and tier-II firms to expand digital offerings and build scale.
For tier-II firms, acquisition activity will also be driven by the need to diversify existing offerings, already an area of strength for tier-I firms," added Rajeswari Karthigeyan, associate director at CRISIL.
From a strong 27 per cent compound annual growth rate over two decades through FY14, revenue growth of Indian IT outsourcing services has tapered to below 10 per cent for the past three financial years. Lower IT spending by major global clients and a shift in demand towards digital services have led to the decline.
By various estimates, worldwide spending on digital transformation is expected to cross $1.3 trillion in 2018, growth of around 17 per cent over the previous year. The spending would primarily happen on leveraging of technologies that enable enterprises to become more effective and responsive in a digitally connected world.
In terms of success in digital, Accenture leads globally with about 39 per cent of overall revenue driven by the segment, a testament to its early and focused investment into the area. Indian and offshore-centric IT service companies are in various stages of a maturity cycle in the digital segment. At the end of the December quarter, Infosys derived a little over 25 per cent of its revenue from here. For Tata Consultancy Services (TCS), about 22 per cent of revenues, higher by 39.6 per cent, year on year.
"As a complement, we are seeing digital deal sizes that have been steadily trending up over time. In Q3, we crossed a key milestone, signing our first $50 million-plus digital transformation deal," Rajesh Gopinathan, the managing director of TCS, had said during an analysts' call this month.
Gopinathan added: "While a deal of this scale is still relatively rare, confined to only the most technologically progressive customers, we believe this is the shape of things to come as more and more organisations start implementing a long-term digital strategy."