IT picks up speed

But hurdles need to be crossed

India's Rs 6 lakh crore-plus information technology (IT) industry is back on its high-growth path - led by Tata Consultancy Services (TCS), which is ahead of other large firms in top-line numbers for the second quarter. TCS is in the unique position of achieving "all-round strong growth across markets and industries". It has also achieved robust bottom-line growth, which has enabled the firm to post a better net margin than the traditional industry leader, Infosys, for the second successive quarter. This has put TCS in a separate league from the rest of the industry, where individual firms may clock exceptional numbers in one quarter but none can equal it in terms of consistent all-round high performance on a large base over successive quarters.  

In achieving high growth, all firms have been given a leg-up by the rupee, which has depreciated against the US dollar during the quarter by 5.4 per cent. But industry leaders have also achieved good volume growth, which has taken top-line growth way above the beneficial impact of rupee depreciation. HCL Technologies has benefited from strong infrastructure services growth and mid-sized firm Mindtree has gained from an overall improved demand scenario. It is noteworthy that volume and top-line pickup (the latter by around 15 per cent in dollar terms) has occurred even as the US economy is projected to grow in 2013 by 2-2.3 per cent and the euro zone has just got out of recession in the second quarter. Thus, recovery in demand growth for outsourced IT services is well ahead of recovery in overall demand. TCS has explained the scenario by saying that companies have to rethink their processes and business models and this presents "enormous opportunities" for Indian IT vendors.

But tough times are not over yet. Price discounts are not being offered and prices have not declined across the board, but realisation in individual offerings has suffered. Plus the signals about discretionary spending by clients - which goes into development of new technology - are mixed. TCS sees a strong discretionary spending environment, whereas Mindtree says customers are "starting to initiate discretionary spend". Apart from volume and currency depreciation benefits, what has helped the successful firms the most is continued proficiency in execution. The best of Indian IT, thus, remains efficient executioners of routine operations; but the continued reliance on time and material business, as opposed to fixed-cost contracts where the risks and rewards lie with the vendor, puts it at the commodity end of the spectrum. Service providers who wish to go up the value chain in the age of cloud computing need to come up with proprietary platforms. The increasing use of reusable tools, which take forward automation in executing routine functions, would also help. The leading Indian IT firms are well into this space; but proof of actual progress made will come from a clear decline in the importance of time and material business in overall revenue.