Political uncertainties, currency fluctuations and economic recessions have made the going somewhat tough for most IT firms in the European markets. Top IT companies have seen a drop in the share of business from Europe in the second quarter ended June 2010. Infosys saw a sequential drop in revenue to $275.7 million in the second quarter ended June 30, 2010, from $291.6 million in the previous quarter. Wipro's revenue has come down marginally to $305.7 million from $306.6 million. For HCL Technologies, business from Europe has dropped to 24.6 per cent from 26.7 per cent. On the other hand, Tata Consultancy Services (TCS) has reported an increase in its share of revenue from Europe to $430.6 million from $424.9 million. Cognizant, too, has shown a rise of 15.3 per cent in its revenue from Europe to $200.17 million from $173.63 million.
Though the entire European economy is going slow, countries such as Germany and France have been showing an improvement. These two countries have been adding positive growth to the total GDP (gross domestic product) of Europe. This has been a positive factor to Indian IT players. However, uncertainties in certain countries such as Portugal, Ireland, Greece and Spain (PIGS) will have some impact on Europe's economy. This is bound to challenge the outflow of business to Indian IT companies.
Luckily, many Indian IT companies do not have direct exposure to these markets. Many did feel that the economies in PIGS would have contagion effect on the rest of the European countries in the global economy's context. But these concerns have been eased now, says R. Chandrasekaran, President and Managing Director, Global Delivery, Cognizant.
Market analysts estimate that Europe's GDP will grow between one per cent and two per cent in 2010, led by Germany. In terms of IT market, most analysts are predicting a return to growth in 2010. For example, IDC predicts that the Western Europe external IT services market will grow to $204 billion in 2010 and further to $232 billion in 2011.
Though the business from Europe has been relatively slower for TCS, in constant currency terms, it has seen growth in both Continental Europe (which grew by 1.2 per cent) and the U.K. (which grew by 8.1 per cent). The company remains confident of the business prospects in Europe, as it looks ahead. TCS is well placed in terms of its current operations and client base to take advantage of growth opportunities that the market may provide in the coming years. TCS sees France and Germany as the two major growth markets of the future and has been ramping up teams in these countries, says S. Lakshmi, Head, U.K. and Europe Operations, TCS.
Cognizant has seen a solid business growth from the European market in the second quarter.
The company's European revenue grew 15 per cent sequentially and 20 per cent after removing currency effect. Cognizant's U.K. business, in particular, saw a growth of 22 per cent sequentially, some of which was driven by mergers and acquisitions.
It has been cited that currency fluctuation and conversion have been important reasons for the Indian IT companies' setback. This has been a cause of concern for the Indian IT players. R. R. Srikanth, Chief Financial Officer, Polaris Software Lab, says that foreign exchange fluctuations in pound sterling and euro will certainly have an impact on the EBITDA (earnings before interest, taxes, depreciation and amortization) margins. However, calculative and pre-emptive hedging acts as the natural solutions to this problem.
With all these uncertainties, it is said that in the medium-to-long-term, the European market can create lot of opportunities for Indian players. Krishnan Chatterjee, Chief Marketing Officer, HCL Technologies, says that increased focus on cost reduction in Europe could drive offshoring to India. It will also present an opportunity for Indian IT companies to explore newer models for engagement, impact measurements and reward thereof.
The players who are able to invest in European Union markets keep in mind the marginal and long-term growth factor that will benefit them. These companies which have larger exposure to these markets face a bigger challenge when compared with those which have marginal market share.