Why Automation is the New Buzzword for Indian IT Companies

Share prices of big IT companies, including those of Tata Consultancy Services and Infosys, could jump by as much as 20 per cent because of increasing automation of IT services, according to a Bank of America Merrill Lynch research.

“Successfully leveraging automation would improve visibility on large-cap India IT sustaining its current profitability levels and thus provides a potential upside risk of 12-20 per cent to stock values,” said Kunal Tayal of BofAML.

Here are 10 key pointers from BofAML’s research

1) Automation is any functional activity that was previously performed manually, and is now handled via technology platforms or automation tools.

2) Automation could contribute up to 20 per cent to revenue base of IT companies by 2020 fiscal year, up from just 1 per cent as of 2015. Commoditized services such as application development, application maintenance, infrastructure services, and business process services have maximum scope of automation. Together, the four service lines contribute around 70 per cent to revenues of IT firms.

3) Competitive pricing is the biggest reason why IT companies are opting for increasing automation. Almost half of the 561 IT services companies generate a net margin of less than 5 per cent.

4) Pricing pressure will hasten consolidation in the IT industry. Consolidation will help the top-4 Indian IT vendors; they can gain 120-150 basis points in market share over 2014-17 calendar year versus 90 basis points in the previous three years.

5) Automation helps save costs and increase profitability; it could help IT firms defend a 10 per cent pricing pressure in commodity services such as application maintenance, infrastructure services, and business process services.

6) Automation can help IT firms increase employee utilization rate and lower headcounts for functions like project support activities and quality management. This will lead to price advantage for IT firms.

7) Hiring in the IT industry has kept pace with revenue growth. Over the last eight years, revenue and employee headcount for the top 4 Indian IT firms have grown linearly at 15.5 per cent and 14 per cent CAGR respectively. Automation will help companies hire lesser people and increase profitability. Headcount growth is likely to grow at 2/3rd the pace of revenue growth over FY15-20.

8) Automation generates rich data, which can be used for business analytics, a large opportunity for IT companies. Big data/analytics is a large subset of the high-margin digital opportunity all IT companies are vying for.

9) Indian companies’ increased focus on automation is evident in the past six months. TCS maintains a lead versus peers with its Mastercraft suite and the recently launched Ignio platform.

10) Infosys has made rapid strides in the last six months. The company is aggressively pushing its Infosys Automation Platform or IAP. However, IAP’s artificial intelligence capabilities are in early stage of development unlike TCS’ Ignio or Wipro’s Holmes.