Read the IT leaves

The IT industry results for FY 2023 – 2024 present a muted picture of the industry in the short-term. I had written last year about the Indian IT industry, and how the long-term trend is positive (Indian IT in a funk | LinkedIn). I continue to hold that opinion.

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A few secular trends:

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-??????????? Most companies either grew in single digits or actually saw decline in revenues. The projections for this year (2024 – 2025) are muted too.

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-??????????? The same is the case with global IT players. However, Indian IT continues to eke market share gains. Indian IT has scaled up well in terms of taking large deals and developing multi service line capability.

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-??????????? GCCs are a compelling segment of the IT industry now, and are showing higher growth than the overall industry.

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The situation is likely to improve next year (2025 – 2026). The low base effect of last year 2023 – 2024 and low growths this year will provide a mirage of growth. That said, I see green shoots, especially in companies that are reaching the upper level of their employee utilization. Not all companies declare this number. An 85 % number is very healthy in this industry. You can aim for higher utilization in the short-term, but in that situation you leave little scope for adding in a large client at short notice. You will be forced to immediately crank up hiring. Smart companies manage their operations so that they stay close to this number. ?(If companies are winning large deals at high utilization, one of the reasons it will take time for the deals to start converting to revenue is that there aren’t people available to be staffed on these deals). [More about this in another post].?

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Strategic Plays:

However, there still exists scope for strategic plays in the industry. A few companies have the ability to upset the apple cart.

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-??????????? TCS crossing 30 BUSD annual revenues: Though there was a CEO change recently, organic growth and execution of its stated strategy should see TCS be the first Indian IT company to cross the 30 BUSD milestone. No surprises here. The aim should be capitalize on this period to scale up and lead on new age tech.

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-??????????? Infosys can take the # 2 mantle from Cognizant. The CEO post is stable, growth has been middling but there was improvement in utilization and RPP. Similar organic growth and a small tuck-in acquisition can accelerate its entering the big boy club of 20 BUSD annual revenues and possibly overtake Cognizant in the process this year.

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-??????????? TechM should be planning to get to the 10 BUSD mark. It will take strong execution, focus on FSI (which has not been a strong point for TechM, and which their new CEO will want to ramp up) and a couple of big acquisitions to get there. However, the company announced that it would not be focusing on acquisitions in the near term (perhaps due to the multiple acquisitions in the recent past). So the path to 10 BUSD will be longer. The immediate task seems to be stability and predictability.

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-??????????? LTI Mindtree should be focused on the 5 BUSD number in the short-term. The 10 BUSD number by 2030 is aspirational (but achievable) and will need a 15 % CAGR over the next 6 years. It will not be possible to achieve this growth organically, though an acquisition or another merger could help accelerate efforts.

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Overall:

-??????????? Market sentiment will improve (in about a year, in my opinion). It is a question of when, not if. At this stage lies the opportunity to differentiate and upset the apple cart. Companies that are scaling up new offerings, are investing in AI and upskilling resources, and are competing hard in the market for deals will be the first of the block to capitalize on the opportunities (long-term programs and discretionary projects) that open up.

For example, there will be the need for a new operating model (see the related article The Operating Model for GenAI | LinkedIn) when AI and GenAI are used in production. The product and services landscape is very different, and managing a 200,000 + employee services company is a different play than managing a focused tech giant. nbsp;The AI factories of MS, Google, Meta etc are unlikely to stand up large scale implementation or consulting teams to help clients navigate the landscape. IOPs can scale up and capture this segment of the market in the future. (Even here, Accenture has taken the lead and was the first to start reporting revenues and projects for GenAI quite a few quarters ago).

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-??????????? All players need to think of a compelling value proposition vis a vis GCCs. Indian Offshore Providers (IOPs) provide a great value proposition for business as usual scenarios. When the industry forces are leading to a realignment towards AI, digital etc, the value proposition needs sharpening.

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The gains will go to the companies that are able to stabilize themselves to be ready for the next phase of IT industry growth.

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