TCS, Infosys and HCL Tech have the most to gain from post COVID wave of outsourcing
- A third wave of outsourcing is on its way and Indian IT companies like Tata Consultancy Services, Infosys and Tech Mahindra have the most to gain, according to Goldman Sachs.
- Riding the third wave, Indian IT services behemoths are on the edge of doubling their market share, seeing double digit revenue growth and wider margins.
- TCS, in particular, will be racing ahead of the rest.
AdvertisementThere’s obvious opportunity for Indian IT companies like Tata Consultancy Services (TCS), Infosys, HCL Technologies and others as more businesses look to enable ‘work from anywhere’. This will be the third wave of outsourcing this millennium, according to Goldman Sachs, with the potential to double market share for Indian IT services giants, deliver double digit revenue growth and expand margins.
|Time period||Outsourced IT services spend growth|
|Last 10 years||4-5%|
“After a steep decline of 2.7% in USD revenues for the Top 5 Indian IT firms in FY21E due to the COVID-19 impact, we are expecting a sharp revival in growth over FY22 and FY23E,” said the global investment behemoth Goldman Sachs. The only company that seems to be left behind the fray is Wipro.
TCS, on the other hand, may race ahead of the others. It has an edge since it’s the only Indian IT company with greater market share in healthcare than in manufacturing.
“We see TCS as one of the largest beneficiaries of these trends given its wide array of services and capabilities, geographic presence, wide client base, consistent strong execution and ability to work remotely at a large scale with c.450K employees,” said the Goldman Sachs’ report dated August 28.
Riding the increased reliance of businesses on digital technology, working from home also cuts down costs like transportation and infrastructure expenses, allowing companies to expand their margin and get a bigger bang for their buck.
How Indian IT companies will ride the third wave of outsourcing
Demand already exists. History also supports the conclusion that the Indian IT industry is normally a late cycle beneficiary of global changes in technology.
When the first wave of outsourcing occurred in 2000 after Y2K — a computer program bug that was expected to cause havoc as the year changed from 1999 to 2000 — the Indian IT sector grew faster than 40% from a small base and minimal global penetration to Indian IT companies becoming market leaders, according to Goldman Sachs.
AdvertisementAnd, again, after the 2008 GFC when the Indian IT industry grew at more than 15% for three to four years before growth returned to high single digits. “This happened both due to a shift to cloud based infrastructure and the higher use of automation tools, forcing Indian IT firms to look for new ways to sell IT solutions, shifting from labor cost arbitrage to business transformation through digital technologies,” explained the report.
This is compounded by the fact that India is currently home to the largest pool of digital skilled employees in the world.
“We believe these digitally trained employees at Indian IT firms are likely to drive overall revenue growth, which would be the key reason for their increasing relevance amid the requirement for digital-at-scale solutions,” said Goldman Sachs.
However, not everything is as rosy as it appears
Even though businesses are looking to become more digital, recurring revenues for IT companies have been falling as compared to those vendors which specifically provide software as a service (SaaS) and infrastructure as a service (IaaS).
In order to address this risk, Goldman Sachs argues that Indian IT services companies will focus more on signing large contracts that look after a client’s entire IT function. These companies also have the option to sell their solutions on a vertical-specialised platform — one that focuses on a specific industry — to increase stickiness of revenue.
“Both of the above approaches require more fixed-price and outcome-based contracts with higher risk-reward,” said the global investment firm.
Examples of this strategy being applied already exist with Infosys’ deal with Verizon in late 2018 and TCS’ deal with Walgreens Boots Alliance (WBA) for $1.5 billion in February earlier this year.
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