For a decade, the triumvirate of Tata Consultancy Services, Infosys Technologies and Wipro has topped the charts in the Indian IT industry. Satyam Computer Services - now Mahindra Satyam - had almost gatecrashed into the party but was done in by a scam orchestrated by its founder, B. Ramalinga Raju.
Today, two companies - one, a relative newcomer and the other 27 years old - seem ready to stage a coup of their own. Cognizant Technology Solutions, a company headquartered in the small eastern US town of Teaneck, New Jersey, but with 80 per cent of its delivery in India, and HCL Technologies (once a calculator-maker called Hindustan Computers) are both ready to edge into the top three.
Already, there are signs that the two firms are making life difficult for India's top outsourcers. Cognizant expects a revenue growth of 36 per cent this financial year (ending December 2010), which should give it an additional $1.2 billion in sales - a figure none of its rivals has achieved. In the quarter to June 30 this year, its revenues grew by $145 million, the highest-ever increase for a top five Indian IT firm. For calendar 2009, its financial year, Cognizant added $572 million to its revenues - more than the combined $534 million reported by TCS, Infosys and Wipro for 2009-10.
Unlike its Indian rivals, whose leadership is based here, Cognizant's top team is based in North America and the company is listed only overseas. Even at its pace, its growth has been steady. Banking and financial services, and manufacturing account for two out of every three revenue dollars, and its penetration into other industries has been surefooted rather than spectacular. Cognizant, until 2006 ranked No. 6 by revenues in the Indian IT pack, is at No. 4 and within striking distance of Wipro today.
Getting it right
In September 2008, HCL acquired Axon, the world's largest independent provider of remote management services, for $814 million. HCL claims to have increased revenues by over 128 per cent in the last five years, from Rs 3,323 crore in 2004-05 to Rs 12,565 crore in 2009-10, the highest rate in the industry. It has accounted for 30 per cent of the incremental revenue addition of Indian IT, even though its market share is at 12 per cent.
As these companies have grown, they have made their Indian (and indeed multinational) rivals increasingly jittery. Cognizant has focused on just four industries and tried to assimilate service delivery lessons from Indiabased vendors as also build consulting muscle like at the IBMs and Accentures.
"The top six India-centric providers enjoy a 2.7 per cent share of the global IT services market," says R. Chandrasekaran, President and Managing Director of Cognizant. "Our strategy focuses on winning as many customers and broad-basing our range of service offerings across mature and emerging verticals."
At the same time, Cognizant is also beating its larger Indian rivals at their own game. Cognizant gets 57 per cent more revenues from its top five clients than Wipro and is almost on a par with Infosys, brokerage Kotak Securities had pointed out in an August report. Unlike its Indian rivals, who focus on maintaining net margins of 25 to 30 per cent, Cognizant has gone for building revenues and boosting domain expertise even if it means being happy with margins of 19 to 20 per cent.
This means that Cognizant is breathing down the neck of the No. 3, Wipro. The gap is just $99 million and, given Cognizant's 15 per cent quarter on quarter revenue growth, some analysts say it is only a matter of time before changes occur. "Revenues from the US are 26 per cent higher than Wipro and just 5 per cent short of Infosys," Kotak analysts Kawaljeet Saluja, Rohit Chordia and Vineet Thodge wrote in their report. They also point out that the revenue gap between Cognizant and Infosys in the financial services market is down to just $19 million a quarter.
HCL, too, has been fine-tuning its business model. It has its revenues spread evenly amongst infrastructure management, application development, enterprise applications and R&D services. "This is a battle of business models, not of individual companies," says CEO Nayar. "We are the No. 1 player in three of the four markets we are in and application development is a must to undertake total IT deals."
To be sure, this won't be an uninterrupted growth story for the two companies, especially for HCL, whose remote infrastructure management business is already under threat from large MNCs such as IBM and HP (See our story on multinationals, Sitting Pretty). For Cognizant, the challenge could arise when its Indian rivals expand their consulting business in the West and MNCs attack its global delivery from India.
Both the challengers are aware of these possibilities. For example, HCL has started an internal venture capital-like unit to seed and fund five potentially high-growth businesses in areas such as mobility and cloud computing.
"We've done this in the past with Comnet (now its infrastructure management practice) and we want to nurture an entire business ecosystem," says Nayar.
Cognizant has grown its business consulting unit to over 2,000 people and sees it as key long-term edge over its rivals. It is also hiring statisticians and mathematicians to better mine data for clients. "We balance investments across multiple return horizons - making sure to capitalise on near-term opportunities, but never losing sight of planting seeds for the future," says Chandrasekaran.
If those acorns turn into oaks, the top echelon of the Indian IT industry could be noticeably different in less than a decade.