Why Indian IT services will expand strongly in the pandemic

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Why Indian IT services will expand strongly in the pandemic
Inside the offices of Wipro in Bangalore. The impact on Indian IT service companies from the recent surge of Covid-19 cases will be limited as revenue from India contributes only 4 to 5 percent of the total revenue of these companies.Courtesy: Getty Images

Robust revenue growth driven by digital-transformation order pipeline will be a strong cornerstone of fiscal stability this year.

The robust growth of India’s IT sector and the transformation of the bulk of the country’s commercial landscape into the digital domain, will support strong revenue growth for Indian IT services companies in the current fiscal year in defiance of the pandemic, according to a top global ratings agency.

“We believe the impact on Indian IT service companies from the recent surge of Covid-19 cases will be limited as revenue from India contributes only 4 to 5 percent of the total revenue of these companies," Fitch Ratings said in a non-rating commentary recently.

The agency said the revenue growth will be mainly driven by the digital-transformation order pipeline of Indian IT companies. It forecasts top-tier Indian IT services companies including Tata Consultancy Services, Infosys, HCL Technologies and Wipro, to record double-digit revenue growth in FY22. Infosys and HCL are poised for 12 to 14 per cent and double-digit constant currency revenue growth respectively in FY22 while TCS remains focused on achieving double-digit growth rates over the medium term.

The revenue of top-tier companies – those with annual revenue of at least $10 billion – rose by around 1 percent in constant currency terms in FY21, Fitch said.

IT prospects continue to look bright. In addition, several short-term economic indicators such as auto sales, electricity consumption and highway toll collection also pointed to a strong recovery in the early part of the year, before the second wave of the pandemic struck.
IT prospects continue to look bright. In addition, several short-term economic indicators such as auto sales, electricity consumption and highway toll collection also pointed to a strong recovery in the early part of the year, before the second wave of the pandemic struck.Courtesy: Getty Images

Critical juncture

The forecast comes at a critical juncture for the Indian economy.

Last month, India’s Goods and Services Tax (GST) – an excellent barometer of economic activity – hit Rs1.41 trillion ($19.1 billion), its highest ever monthly collection. Indeed, it’s been higher than the benchmark Rs1 trillion for seven consecutive months and higher than the same month for the last year for eight consecutive months.

India’s international merchandise trade also reached its highest ever peak of $34 billion in March, and stayed over $30 billion in April.

Similarly, several short-term economic indicators such as auto sales, electricity consumption and highway toll collection also pointed to a strong recovery in the early part of the year, before the second wave of the pandemic struck.

India’s international merchandise trade also reached its highest ever peak of $34 billion in March and stayed over $30 billion in April.

However, with the fiscal headroom for any expedited expansionary spend made possible by the buoyant tax collections, the government has at its disposal tools such as the National Infrastructure Pipeline through which it can substantially boost infrastructure spending immediately – a strategy that analysts say will benefit the IT sector as well.

The work of Dwarka Expressway is underway during the visit of Union Road Transport and Highways. The government has at its disposal tools such as the National Infrastructure Pipeline through which it can substantially boost infrastructure spending immediately – a strategy that analysts say will benefit the IT sector as well.
The work of Dwarka Expressway is underway during the visit of Union Road Transport and Highways. The government has at its disposal tools such as the National Infrastructure Pipeline through which it can substantially boost infrastructure spending immediately – a strategy that analysts say will benefit the IT sector as well.Courtesy: ANI

Rising demand

A recent Credit Suisse study highlighted how more than 100 unicorns – companies with more than $1 billion valuation – have sprung up in India in just a few years. Combined with easier access to capital, faster land acquisition for marquee projects and new business investments, encouraging more digitization of retail through simpler rules can further open the national market to small businesses – thereby benefiting the IT sector immensely.

According to Fitch, demand for IT services has increased significantly since last financial year as business customers accelerate efforts to offer enhanced online services and online working platforms to remain competitive and relevant in a business environment affected by the pandemic.

IT services spending will rise by 9 per cent in 2021 after a 2 per cent decline in 2020. Fitch expects Indian IT companies to expand faster than the industry average as they have significant cost advantages compared with peers in developed countries due to lower labour costs.

People stand in long queues outside State Bank of India for their pension payment. A report from FIS in September 2020 found that 68% of Indian consumers were using online or mobile banking to conduct financial transactions which is a shot in the arm for IT.
People stand in long queues outside State Bank of India for their pension payment. A report from FIS in September 2020 found that 68% of Indian consumers were using online or mobile banking to conduct financial transactions which is a shot in the arm for IT.Courtesy: Getty Images

Opportunities in banking sector

Apart from retail, one of the major areas of opportunity is India’s thriving banking segment – which need to step up spending on technology as more customers move to digital channels, straining their IT systems that have often been found to be lacking. A series of recent glitches at the biggest private sector lender in the country invited a rare rebuke from the regulator.

IT services spending will rise by 9 per cent in 2021 after a 2 per cent decline in 2020. Fitch expects Indian IT companies to expand faster than the industry average as they have significant cost advantages compared with peers in developed countries due to lower labour costs.

Lenders in India on aggregate spend between 1.5% and 2.0% of their annual revenue on technology, compared with a range of between 7.0% and 10% by global banks, according to PwC India. Indian banks have invested more on customer-facing solutions than on their infrastructure backbone. Vivek Belgavi, India fintech and technology consulting leader at PwC, advised local lenders to scale up their technology spending to 5.0%, and up to 8.0% of their revenue.

“Indian banks will need to materially increase their spend on technology," Renny Thomas, senior partner, and Milan Mitra, associate partner at McKinsey & Company, said. "This is largely in turn dependent on their transaction and product mix, with a larger intervention needed in retail banking segments," they said.

Similarly, several short-term economic indicators such as auto sales, electricity consumption and highway toll collection also pointed to a strong recovery in the early part of the year, before the second wave of the pandemic struck.

With the pandemic causing a surge in customers using digital banking channels, a report from FIS in September 2020 found that 68% of Indian consumers were using online or mobile banking to conduct financial transactions, and 51% were expecting to continue to use these banking and payment methods after the pandemic.

Even before the pandemic, the Reserve Bank of India's Digital Payments Index rose to 207.84 in March 2020, from 153.47 a year ago and compared with a base score of 100 in March 2018 when the central bank started compiling the data. More customers using online channels for their banking needs might have strained the IT infrastructure at some banks – but in the long run it opens a huge window of opportunity for India’s robust IT sector.

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