Strong IBM, SAP need not be positive for IT services

Analyst feel driving co-relation between Indian IT services players and MNCs getting difficult

The full year results of IBM and SAP are sending mixed signal for the Indian IT services.

Analyst believe that even though both the companies have reported better numbers, there will be no material acceleration for the Indian IT services sector. Moreover, driving co-relation between MNCs and Indian IT players is also getting difficult.

IBM, one of the largest IT product, solutions and services provider, while gave an upward guidance, a closer look at its fourth quarter numbers shows a different picture. One that is relevant for the Indian players.

For instance, IBM said that services contract signings were down 12 per cent from a year ago at $17.9 billion. IBM’s global business services and global technology services, which co-relate with the Indian IT services model, was flat to slightly declining on a year-on-year basis. Global technology business revenue was down 2 per cent, and global business services was down 3 per cent. Add to this IBM saw growth coming from emerging markets. Rather it said that its backlog in the emerging markets was up 15 per cent.

Ashwin Mehta and Pinku Pappan of Nomura Equity Research in their report suggest that there was limited upside for the Indian IT services players as outsourcing booking were down 27 per cent, add to that Indian players are more dependent on mature markets like the US and Europe and not emerging markets where IBM has seen growth.

Analyst also said that IBM’s move to focus on improving margins by moving out from low margin work might not augur too well for the Indian players. As a part of its endeavour to change business mix, IBM has seen double digit growth in analytics, smarter planet and cloud. “I will not be surprised if Indian players are grabbing the low margin deals that IBM is letting go. That does not mean that Indian players are grabbing market share from MNCs,” said an analyst on condition of anonymity.

Even in case of SAP that has guided for a revenue growth of 14-20 per cent, the drivers for this are mobile, analytics and cloud. “Like before you cannot co-relate the growth targets of the MNCs with the Indian IT players. In case of both SAP and Oracle they are seeing growth drivers from cloud and analytics. And these are still very small for the Indian players,” said another analyst of a leading research firm.

For Indian players application development and maintainance still constitutes the core of their revenue (upwards of 50 per cent), this is traditionally driven by the sale of core applications from players like SAP and Oracle and others. “But Oracle’s core application grew 4 per cent and SAP said that core business grew 10 per cent. Though still in double digit compared to other businesses the 10 per cent looks small,” said the analyst.