Shifting dynamics: Top IT players navigate niche growth avenues

A Mint analysis, spanning four quarters of 2023, revealed that Tata Consultancy Services, Infosys, Wipro and Tech Mahindra witnessed robust growth across manufacturing, health and life sciences, and energy and retail.

The sectors outpaced the companies' overall net revenue growth, which is expected in a challenging year marked by a decline in business from primary revenue source—banking, financial services, and insurance (BFSI).

However, HCL Technologies, the other firm in the top five, was an outlier, with its BFSI revenue outpacing overall growth.

Industry veterans said this indicated increasing tech maturity in these verticals leading to more tech transformation deals, compared to the saturated BFSI sector, which is already an advanced market.

However, this isn't good news for midcaps, such as Cyient, Persistent Systems, and Zensar, which might face heightened competition from larger firms, despite having developed specialized competencies in these sectors.

According to Mint's analysis, manufacturing witnessed the fastest growth for Infosys and Tech Mahindra at 12.1% and 8.7% year-on-year, respectively. In comparison, Infosys' quarterly revenue in December remained largely flat, while Tech Mahindra saw a 5.7% yoy drop.

TCS, India's largest IT services firm by market cap, witnessed its energy, utilities, and resources vertical emerge as the fastest-growing, with key businesses growing at 12.8% YoY, albeit on a smaller base than others. TCS' quarterly revenue rose 2.9% YoY in the December quarter.

For Wipro, healthcare performed well, growing nearly 10% yoy during the December quarter, while its overall revenue dropped by 5.8%.

Noida-headquartered HCL Technologies was the only outlier, with its BFSI revenue rising 14.8% YoY over the past four quarters. HCL’s quarterly revenue rose 5.3% YoY in the December quarter, also marking it the only outlier that has posted meaningful growth this year. It is also on target to meet its guidance at the start of FY24.

Industry experts attributed much of these trends to specific deals, the demand for tech transformation in particular verticals compared to BFSI, and ample room for growth.

Kashyap Kompella, founder and chief executive of consultancy firm RPA2AI Research, said the post-pandemic resurgence in manufacturing was a key factor, “as clients are strategically investing in digitizing operations and improving supply chains."

The rise in manufacturing, healthcare and energy sector revenue can also be attributed to the rising demand for engineering, research and development (ER&D) services. While Kompella said ER&D is a “relatively small" subset for the largest domestic service providers, there is scope for growth.

“The ER&D sector is a bright spot in the Indian IT industry’s growth prospects. At 7.4% YoY, it is the fastest growing part of the industry, as evidenced by Nasscom data. In addition to organic growth, strategic investments and acquisitions can help companies tap the ER&D opportunity," he said.

Abhinav Johri, tech partner at EY India, said BFSI, along with technology, media and telecommunications (TMT), could so far earn revenues at scale because “adapting to new technologies was central to their growth agenda." Tech transformations, however, were not core to the growth of manufacturing, healthcare, energy and public utilities businesses, which are often collectively referred to as the ‘old economy’ industries, he added.

“The manufacturing, healthcare, and energy sectors never saw adapting to new technologies as investment towards growth because it was a cost conversation for them most of the time. The sectors which perhaps were not opting and adapting to new emerging technologies have come around to it now, and they find value in that," said Johri.

Another factor is the "sufficient tech capability" within BFSI and TMT to either internally experiment or operate their own back offices and global capability centers (GCCs)" Johri said. This supports the growth of the old economy verticals and also clarifies why they may continue to outpace the traditional growth drivers in the coming quarters, he added.

For HCL Technologies, the focus on emerging technologies saw its BFSI growth surge, said Srinivasan Seshadri, the company's chief growth officer and global head of financial services, adding that it will focus on “core modernization" as a growth factor to fuel further BFSI growth.

Infosys declined to comment, citing a silent period due to its upcoming FY24 annual earnings. TCS, Wipro and Tech Mahindra did not respond to Mint’s emails seeking answers on their new growth verticals.