Here's why IT companies are not growing fast enough

Wipro joined Infosys and TCS is disappointing the market with its subdued performance. TCS, the leader in the IT space, was vague in its outlook for the market ahead, while Infosys lowered its guidance for the year. Wipro, on the other hand, is yet to get its bearing right with regular changes in its management structure. The company has forecasted revenue growth of 0-1% against an expectation of 2-4%. Among the top players, Wipro was affected the most by fall in oil prices as its dependence on energy and utilities is high.

The initial trend in IT company results suggests tough time ahead for the sector. This is also reflected in the share prices of IT companies. BSE IT index has fallen from 11,157.8 to 10,764.7 -- a fall of nearly 3.5%. Interestingly, companies that announced their results have fallen more.

Over the past few years, one or two among the top companies used to report slowdown issues, but it was rarely that all of them had doubts on their growth. The post-result commentary from management of these companies suggests the challenging times ahead.

Many Indian companies are dependent on discretionary spends of their customers. In case of a slowdown, they are the first ones to get affected. Secondly, it is the transition taking place in the industry which is moving towards automation and digitalisation.

Sudin Apte of Offshore Insight, a company tracking the IT sector, says that based on their survey of 400-odd North American, European companies, the current fiscal will be challenging. The global slowdown in the economy in general and pressures from financial services firms and telecom industries in particular are some of the factors that will be impacting growth, says Apte.

The key factor seems to be the widening gap between the requirement of clients and what Indian IT companies are offering. Apte says there is a gap between what clients want and what Indian companies are offering. There is a gap between the rate at which the end user is adopting digital technology and what Indian companies are offering. Clients are moving much faster than what Indian companies have to offer.

In his interaction with the media, Wipro CEO Abidali Neemuchwala said: “Overall, we find the movement of the budget continues from the run-the-business areas to change-the-business.” Automation is now the buzz word, which would require lower staff strength but more creativity and domain knowledge.

The main cause of worry is the the slow pace at which the Indian IT sector is adapting to the changing times. Indian companies have been reluctantly increasing their dependence on the new technology though all of them have seen traction in bagging orders in this space. 

Recognising this shortfall, Indian IT companies shopping for digital boutique companies which can help them ramp-up their offerings and growth.

Another reason for the slowing growth in the IT space is that the transition takes place is cannibalisation of the existing business. Industry expert Moshe Katri points out there will be cannibalisation of legacy services as companies try to lay their hand on the limited orders in the market. Katri says this is an industry-wide phenomena and a multi-year cycle one.

The top Indian companies have clearly taken the lead, though slowly, to move from legacy to digital. But in the interim, growth will have to be sacrificed. The fastest company to have a meaningful contribution of digital business will be the clear leader in the next run of IT stocks. For the present fiscal, none of the top players are confident of meeting the digital challenge.