As 2006 draws to a close, the biggest challenge for the Indian technology companies is to get realistic about their new revenue addition for 2007-08. As big-ticket deals get fewer and fewer, the hot industry is asking itself: where will the new revenues come from? And whether the success of the top six industry players in 2006 will hold their places in the new year and beyond.
The industry is debating this at two fronts: Are financial analysts projecting continued success of the organic growth models of leading companies such as Infosys and Cognizant in 2006 across the board for all the frontline technology companies? Are the expected revenue additions for 2007-08 a little too aggressive or is the industry's progression to higher profit margin work going to fuel growth?
To put the facts first: The top six IT outsourcing vendors with India-centric work - Infosys, Cognizant, TCS, Wipro, Satyam, HCL Technologies - are expected by analysts to grow 32 per cent year-on-year to $17.2 billion in the year to March 2008 from $13 billion in the current fiscal year. However, the new revenue addition of $4 billion for FY08 seems to be a rather aggressive one, according to CLSA's report on the sector, released in September 2006.
"We fear that the Street has extrapolated continued success of the organic growth models - Infosys and Cognizant - across the board for most of the frontline technology companies," said the CLSA India report. This discrepancy emerges stronger when revenues of the current year are stripped off acquistions made by Tata Consultancy Services and Wipro and Infosys and Cognizant are excluded from the forecasts.
In such a scenario, new revenues are expected to grow 50 per cent year on year in FY08 for TCS, Wipro, Satyam and HCL Technologies compared with 15 per cent year-on-year in FY07 and 11 per cent in FY06, it points out.
"Though there is some acceleration expected in demand coming from discretionary spending, as per vendor feedback, the extrapolations into FY08 seem unreasonably aggressive," the report adds.
Opinions, however, differ on whether the aggressiveness in the sector is misplaced. "It's true that there seems to be some amount of saturation in the big ticket application-maintenance-support space, but the aggressiveness going forward is based on the progression of the top-tier companies to high-end jobs like consulting, analysis and design with higher charge rates," says PricewaterhouseCooper Executive Director Rachna Nath.
The upswing in the sentiment of the second and the third rung companies will also come from newer business models. "While some smaller companies will thrive on the sub-contracting from Tier 1 majors, others are busy building up to be picked up by the big brothers and there are still others operating in niche segments to become market leaders," adds Nath.