Headwinds for IT

Infosys and TCS prepare for long-term challenges

The fact that Infosys and TCS announced their second-quarter results for 2015-16 within a day of each other tended to prompt comparisons between the two, instead of a coherent examination of how the two Indian software leaders are countering the headwinds facing the global information technology (IT) sector. The two Indian companies are similar, and have their periodic ups and downs. Right now Infosys is somewhat on the up - with a new leader, Vishal Sikka, at the helm - after being down during a period of leadership uncertainty. TCS, which was doing well when Infosys was not, appears to have fallen behind - in revenue growth but not in net margins - in the last quarter. Still, for a company as big as TCS, it is never easy to post revenue growth of close to 30 per cent continuously, as it did during the three years to 2014. Things have to ease up sometime, as has happened through the last year and now. On the other hand, Infosys, while it was not growing that well, stayed ahead of TCS in terms of profitability (net margin) in three of the last four years.

Of the wider issues facing the two companies, the easier to analyse is the global slowdown. The boats of billion-dollar exporters have to rise and fall with global tides. After nominal growth (1.5 per cent) last year, global IT services spending is likely to actually contract this year by five per cent. So investors in IT firms better be prepared for non-stellar growth for some time to come. But a far bigger challenge facing these companies is the rise in automation and the move to digital and cloud-based services; this shift could take away the traditional Indian business of writing code and maintaining enterprise installations, a business model built on wage arbitrage. The coming winners, therefore, are supposed to be Accenture and Cognizant, which are both strong in the US-based, consulting-led way of doing business. But investor preferences, as reflected in price-earning ratios, paint a more mixed picture. Accenture is ahead of the rest, its price-earning ratio having gone up by over 20 per cent in the last five years. Infosys comes last, with its price-earning ratio having fallen by nearly 40 per cent over the same period. Cognizant has also fallen by nearly 30 per cent. TCS has gone up by a modest 15 per cent. There are no simple lessons from these numbers.

There is every indication that Infosys' leadership is fully aware of the challenges ahead; the company's shift towards innovation and design thinking has certainly been strongly signalled. TCS has been less demonstrative about what it is up to; still, that has always been its style. One hopeful indicator is that even TCS has begun to separately show its digital revenue - and has recorded respectable growth in it. The days of 30 per cent growth are certainly over for now, but that does not mean that India's IT flagships have only decline in front of them.