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IBM, SAP & Oracle results point to little else for Indian IT

Source : BUSINESS_STANDARD
Last Updated: Fri, Jan 25, 2013 20:30 hrs
A broker reacts as he monitors the index on his computer terminal at a brokerage firm in Mumbai

The full-year results of IBM, SAP and Oracle are sending mixed signals for the Indian information technology (IT) services sector.

According to analysts, though the companies have forecast strong growth in CY13, there will be no material acceleration for the Indian IT services sector. More, driving a correlation between MNCs and Indian IT players is also becoming difficult.

IBM, one of the largest IT products, solutions and services providers, has given an upward forecast. However, a closer look at its fourth quarter numbers shows a different picture, one that is relevant for the Indian players.

For instance, IBM said services contract signing was down 12 per cent from a year ago at $17.9 billion. IBM’s global business services and global technology services, which correlate with the Indian IT services model, was flat to slightly declining on a year-on-year basis. Global technology business revenue was down two per cent, and global business services was down three per cent. IBM saw growth coming from emerging markets; the company said that its backlog in the emerging markets was up 15 per cent.

Ashwin Mehta and Pinku Pappan of Nomura Equity Research in their report said there was limited upside for the Indian IT services companies, as outsourcing bookings were down 27 per cent. Additionally, for IBM, the growth driver was emerging markets and segments such as cloud, smart planet and analytics. Indian IT companies have limited presence in Asia-Pacific, and cloud and other non-linear business units are insignificant in terms of revenue contribution.

Analysts also said IBM’s move to focus on improving margins by moving out from low-margin work might not augur too well for the Indian players. As a part of its endeavour to change the business mix, IBM eyes double-digit growth in analytics, smarter planet and cloud. “I will not be surprised if Indian players are grabbing the low-margin deals that IBM is letting go of. That does not mean that Indian players are grabbing market share from MNCs,” said an analyst on condition of anonymity.

According to Pralay Das, research analyst at Elara Capital, IBM’s moving away from low-margin business would also be an indication of rational pricing. “I would say IBM numbers are marginally positive for the Indian IT sector,” he said.

Sudin Apte, CEO and research director, Offshore Insights, believes customers are moving away from traditional core application implementation and focusing on business focus modules, and “while customers are moving fast, IT players are still struggling”. Apte said 70-80 per cent of revenue for the Indian IT Players comes from traditional customisation & implementation, and maintenance & support. This business is under huge churn, he added.

For the German-headquartered SAP, whose revenue guidance is a growth of 14-20 per cent, the drivers have been mobile, analytics and cloud. “Like before, you cannot co-relate the growth targets of the MNCs with the Indian IT players. In case of both SAP and Oracle, they are seeing growth drivers from cloud and analytics. And these are still very small for the Indian players,” said another analyst of a leading research firm.

For Indian companies, application development and maintenance still constitutes the core of their revenue (upwards of 50 per cent), this is traditionally driven by the sale of core applications from players like SAP and Oracle and others.

“But Oracle’s core application grew 4 per cent and SAP said that core business grew 10 per cent. Though still in double digit compared to other businesses, the 10 per cent looks small,” said the analyst.

As in case of the Indian IT services players, the cloud, mobility and analytics segment is also small for the MNC players, too. One strong positive is the discretionary spends coming back. “From an Indian IT services perspective, the guidance given by SAP for CY13 paints a constructive picture on enterprise IT demand trends and should be viewed in conjunction with recent strong results and positive outlook given by the Indian IT vendors,” said Bhuvnesh Singh and Vaibhav Dasmana of Barclays.




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