IT cos focus on new markets, sectors as slowdown bites

India’s top software services companies such as Tata Consultancy Services, Infosys, HCLTech and Wipro may have to scout for new markets and sectors to support their growth plans amid concerns of high inflation, cutback on discretionary spending and saturation in established markets.

Industry analysts say, however, that efforts to shift to new segments could weigh on costs for these companies and impact their operating margins in the coming quarters.

In the September quarter results, TCS reported constant currency revenue growth of 15.4% from a year earlier. Asia Pacific, India, Middle East and Africa contributed 15% of its ₹55,309 crore revenue in the quarter with India having a 5.1% share. While India has a modest contribution to overall revenue, the country outpaced revenue growth for TCS in Europe (including the UK) with a 16.7% increase.

For Infosys, India accounted for 2.9% of its ₹36,538 crore September quarter revenue. While the contribution remains small, this marked a 36% growth from the year earlier, the highest among all markets for Infosys globally.

According to analysts, heavy reliance on the US and Europe, which are currently facing market headwinds from a cumulation of factors, could force a market diversification by the Indian IT services firms.

Akshara Bassi, research analyst for the global cloud and servers market at research firm Counterpoint India, said factors such as  drop in new orders in the September quarter could be clear indicators of weakness in the developed markets. On Infosys, he said, “The company added 103 new clients during the quarter, down from 117 in the same quarter last year. This marks a drop of more than 10% in the number of new orders that the company signed in the quarter. This is a clear sign that there is weakening of established markets, which may further impact the IT sector in the quarters to come.”

Service providers, too, hinted at plans underway to enter new markets. At HCLTech’s earnings conference, C. Vijayakumar, chief executive officer, said the company is increasing the number of facilities in India. 

“We are regularly adding offices across a number of new and first-time markets across India, which we call ‘new vistas’. We already have 25,000 employees working in these offices, and our hiring pace in these markets is at least 5-10% higher than the rate at which we are hiring in our established markets,” he said.

Salil Parekh, CEO at Infosys, also said that the company is working on multiple digital transformation projects in India, as he stressed on the growth of India’s contribution to the company’s revenues.

Analysts, however, stressed on greater emphasis on the growth opportunities that new sectors represent for IT companies, beyond the traditional sectors. 

Naveen Mishra, senior director and analyst at Gartner, said, “The reason why IT services would seek to diversify is to primarily rebalance and rationalize their portfolios. The companies will invest more into offering digital services around cloud transformation and related sectors, which will help them adapt to the new market setup better.”