Industry
The cloud is building; will TCS, Infosys, Wipro get showers of joy?
Summary
- Microsoft Azure, AWS and Google Cloud clocked record new business in the March quarter, a promising turn for India's IT services firms that help move technology work from standalone data centres to those owned by cloud computing firms
Three years since a worldwide race to the cloud boosted India's IT services sector, there are signs of a re-run.
Microsoft Azure, Amazon Web Services (AWS) and Google Cloud clocked record new business in the January-March period, a development which could help India's largest technology services firms grow faster in the current financial year than last, company executives and analysts said.
The three cloud giants together added $2 billion in sequential incremental revenue in the March quarter, a Mint analysis showed, translating into a 36.5% jump from the $1.49 billion they did in new business in the first quarter of 2021.
In 2021, the covid pandemic had forced businesses worldwide to lease computing power offered by these Silicon Valley firms, triggering their strongest growth at the start of the year.
Also read: The good, bad and ugly: Decoding the IT pack’s Q4 show
New cloud business
Azure, AWS, and Google Cloud also recorded new business in the October-December period of last year, reflecting a pick-up in growth after two years of tepid cloud growth.
“There is merit in this argument (whether more growth for cloud computing firms should translate to a corresponding growth for IT services firms) especially because we have seen this play out in the past," said Arvind Ramnani, analyst at investment firm Piper Sandler & Co.
In calendar year 2021, global cloud computing firms saw record revenue and profit, powered by the twin engines of digitization and cloud migration by companies, across industries. Among the beneficiaries were homegrown IT firms such as Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd and Wipro Ltd, which help move technology work from standalone data centres to those owned by cloud computing firms. In 2021-22, TCS, Infosys, HCL and Wipro reported 16%, 20%, 13% and 27%, dollar revenue growth, respectively.
However, conflicts in Ukraine and West Asia and accompanying economic uncertainties led to a slowdown for cloud computing firms. Consequently, growth for Indian IT giants slumped: TCS, Infosys and HCL reported 4.1%, 2% and 5.5% growth, while Wipro saw a 4% decline in revenue last year.
Also read: ‘India a vital cloud market for Google besides the US’
Inter-linked fortunes
As businesses across industries increasingly embrace cloud computing platforms, the fortunes of homegrown IT firms have come to be linked to that of cloud computing firms. For now, none of the large technology services firms quantify revenue from cloud computing. But at various points in the past, top executives of Wipro and TCS have said that the cloud ecosystem accounted for 25-35% of overall revenue.
“A pick-up in cloud demand is good news for Indian IT firms as the performance of cloud computing firms has increasingly become a leading indicator for IT services firms," said a Bengaluru-based partner at a venture capital firm. “At some point during the year, Indian IT firms should stand to benefit from record growth witnessed at these hyperscalers."
“We believe as the macro economy improves, discretionary tech spends will bounce back as the digital transformation journey still has legs despite the over-investments seen over CY20-22. Cloud migration journey is still not over while automation, AI and analytics will likely continue to be drivers of growth," JPMorgan analysts Ankur Rudra and Bhavik Mehta wrote in a note dated 3 January.
Company-specific challenges
But the rise of AI and company-specific challenges, including new CEOs at TCS and Wipro, imply that not all companies would stand to benefit.
“Please bear in mind that we could be seeing an AI refresh by the companies leading to more business for hyperscalers but not corresponding growth for IT services firms as there could be some revenue cannibalization or crowding out of traditional services spending," said Ramnani of Piper Sandler & Co.
For now, IT services companies remain sanguine on the cloud journey.
“While there was good growth in different parts of our digital business, the ones that stood out are cloud transformation and cyber security, both of them had impressive growth along with growth in our SaaS portfolio," HCL Technologies CEO C. Vijayakumar told analysts in a post-earnings interaction on 26 April.
“I think any Generative AI program brings a lot of surround spend to the higher priority levels; so, I think it will cannibalize some discretionary spend, but it also paves the way to some newer areas where the client should put more emphasis on. Both data and cloud migration are getting a little more attention due to Gen-AI," said Vijayakumar.
Also read: Technology and cloud to build a better India
“Our cloud work is growing well," Infosys CEO Salil Parekh told analysts on 18 April. “We continue to work closely with the major public cloud providers and on private cloud programs for clients. Cloud with data is the foundation for AI and Generative AI and Cobalt encompasses all of our cloud capabilities."
AWS, Azure and Google Cloud together, cornered 66% of the $78.1 billion cloud spending in the October-December quarter of last year, according to estimates by research firm Canalys. The three companies had a share of 56% of the $30.2 billion spent in the October-December quarter of 2019.
