Indian IT sector set for a growth phase

Amid every crisis, lies a great opportunity, and the Covid pandemic is no exception. In this perspective, the Indian IT industry is likely to see some favourable structural changes in the coming months. Firstly, negative events like an economic recession or a global pandemic usually lead to higher offshoring of IT services work by global enterprises. This was seen during the Y2K problem in 2000 when Indian programming talent was used extensively to solve the issue, leading to higher offshoring.

Similarly, the economic recession of 2008 didn't derail outsourcing but led to its uptick. As cost optimisation emerges as the key factor for driving growth during this Covid-induced slowdown, outsourcing will get a fillip. This has started to reflect with many large outsourcing deals being clinched by domestic IT biggies.

Last month, Infosys announced its largest deal ever worth around $3.2 billion from German automotive manufacturer Daimler to transform its IT operating model and infrastructure landscape across workplace services. Similarly, Wipro bagged a five-year long outsourcing contract worth $700 million from German retailer Metro that can potentially go up to $1 billion over the following four years.

Secondly, the ongoing pandemic has resulted in the widescale adoption of digital services. Companies across geographies, big and small have embarked on a digitalisation path to mitigate the disruptions caused by this black swan event. Work from Home (WFH) has resulted in higher demand for cloud-related offerings.

Similarly, enterprises' attempt to reach out to their customers digitally, has led to rising demand for app development. As the whole world transact digitally, the need for cybersecurity applications has also seen an uptick. So, the opportunity set for software companies has increased multi-fold. Against this backdrop, the scale of growth in the next 10 years for the Indian IT services companies is likely to be very different from the last decade.

Sensing the opportunity ahead, the Nifty IT index hit fresh record highs last month. From IT biggies including Tata Consultancy Services, Infosys, HCL Technologies to mid-tier firms such as Persistent systems, and Mphasis among others; share prices of most IT firms continue to do well. According to a note by ICICI Securities, the Indian IT sector is going through the first phase of a multi-year technology transformation phase.

The brokerage house expects all top-five IT companies to register double-digit revenue growth in the next two financial years. As the Indian IT sector, which is one of the major exporters of services from the country, is expected to grow at a higher pace, it augurs well for the Indian economy. If the Indian IT companies clinch more deals, they will offer more new jobs.

Employment creation in the IT sector will have a multiplier effect as salaries are high. As a result, real estate and other sectors will benefit. The country needs such a multiplier effect at this crucial juncture to rev up its growth prospects.