The earnings season  is back again. A modest uptick is expected in the fourth quarter revenues of Indian IT companies. However, we see this largely as a result of improving economic conditions and not a turnaround in the competitiveness of the Indian firms in the digital market, says Peter Bendor-Samuel, CEO, founder, Dallas-based Everest Group in a Q&A with Mini Tejaswi of Financial Chronicle

Analysts expect what kind of Q4 numbers from Indian tech firms?

We believe that there has been a modest uptick in the market in Q4 and we expect that this will be reflected in a better 4Q for most of the Indian service providers. But, we see this as largely a result of improving economic conditions and not a turnaround in the competitiveness of the Indian firms in the digital market. The Indian firms will still face a negative secular trend from revenue compression in their legacy business and this headwinds will likely increase offsetting some if not most of the gains from their efforts in digital.

Will this quarter show any improvement in the digital performance of Indian IT?

Indian tech firms still have a long way to go in building successful digital business and yet to fully face the need to change their business models. At this time, the market lacks scaled digital players to truly threaten Indian firms in both their legacy business and contest them in the digital arena. Hence, the Indian firms are largely practicing digital labour arbitrage which is only a small adjustment to their existing factory driven-labour arbitrage business. However, new business models are on their way and once these get to scale they will likely create a substantial headwinds unless the Indian firms are able to change their business models.

What’s your commentary on the performances of BFSI, retail and telecom verticals?

We expect to see stronger performance in retail Insurance and telecom. But, we do not believe that there will be a strong rebound in banking. The Indian firms believe that there will be a substantial rebound in banking, but our data suggest otherwise. In banking, it appears that the banks largely regard the incumbent Indian providers as their legacy partners and are looking to other firms such as Virtusa to be their digital partners. Hence, the growth which digital brings is being captured by other firms than the incumbent Indian providers.

What’s the outlook for next quarter and whole of next fiscal for Indian tech sector?

Everest Group expects that the positive economic trend will continue and hence drive a modest uptick this year. But Indian firms will face strong headwinds as their digital offerings are still lagging and their revenues from legacy businesses continue to be under pressure. Overall we look for a less volatile environment for the next few months. The strong global economy and increase in discretionary spend is creating a little respite for management as they struggle with the challenge of transforming their firms to the new digital reality.

Will Indian tech players be able to build a convincing narrative for their digital story in the global market during fiscal 2018-19?

It varies. Some of the leading firms such as Cognizant and Wipro are making significant strides in developing a convincing market positioning as well as building and buying digital assets which allow them to demonstrate competence. A good example of this is Wipro’s Top Coder subsidiary which provides a scalable crowd sourcing platform for applications design and development. Cognizant is showing some nice acceleration in its digital growth as its past investments and focus on digital is starting to pay off. However, both collectively  and individually, the Indian firms still lag the industry in converting their legacy work to digital.  Although their digital growth is accelerating, I would not characterise any of them as digital leaders at this time. They still face a market which is skeptical about their ability and willingness to change and in general would prefer to have the Indian firms focus on legacy while they turn to different technology and service providers to partner with for their digital transformation.