Emerging Markets Turn A Bright Spot For Indian IT Firms

The Indian IT industry is targeting growth in emerging markets like India, the Middle East, and Latin America, moving beyond its traditional growth markets of the US and Europe amid a sectoral downturn. 

IT majors TCS, Infosys, and Tech Mahindra in the second quarter saw the year-on-year growth rate of the smaller markets rise higher than the US and European markets. At large, the Middle East, Japan, Continental Europe, and emerging markets of Latin America, Africa, and Southeast Asia are the markets being focused on by the IT companies, analysts note. 

“Indian companies initially favoured English-speaking countries, and Australia and Japan were other limited markets that were focused on for a while. Now, the companies are targeting other countries too, as growth in prominent markets is saturating and there is a decline due to scale effects,” Pareekh Jain, CEO of Pareekh Consulting, said. 

The next frontier needs geographical expansion. The emerging markets are now increasingly investing in localisation and digitisation, making it an opportunity for the IT sector, he added. 

TCS in the second quarter saw 95% revenue growth in the India geography. Its Rs 15,000 crore deal with government-owned telco Bharat Sanchar Nigam Limited (BSNL) signed last year has been one of the prominent deals in the region. 

“We are investing significantly to create a large footprint in emerging growth markets. Top bets include India, APAC, Latin America, the Middle East, and Africa. We believe these markets are likely to turn into a sustainable driver of long-term growth. A scalable presence in these markets is likely to provide the muscle for growth in TCS overall business over the next couple of decades,” K Krithivasan, Chief Executive Officer of TCS, said during the earnings call. 

In the second quarter, Infosys tied up with Life Insurance Corporation of India (LIC) to support the state-run insurer’s digital transformation initiative. Tech Mahindra too tied up with Australia’s leading telecommunications company—which it didn't name—to deliver customer experience services. 

Infosys Chief Executive Officer Salil Parekh underscored that the company is seeing good traction in newer growth markets like the Middle East and Japan. Although the markets are relative in terms of size, there is a good outlook for the markets, he said. 

However, driving business from the emerging markets comes with its own setbacks. Omkar Tanksale, Research Analyst at Axis Securities, said, “India is not a contributor to the blended pricing; if $25 per man hour is being charged, clients may not pay at that scale. Maybe geographies like Latin America and the Middle East might generate revenue, but ultimately the US and Europe will remain the majority contributors. The spending power in these regions won’t be able to match that of developed markets.”

The newer markets also do not provide high margins for the IT companies. Analysts opine that while growth in emerging markets is being tracked amid a downturn, companies might shift focus away from these markets once the demand environment in developed markets improves.