europe: Indian IT takes a bigger bite out of Europe as US business growth slows

Europe seems to be stealing a march over the traditional outsourcing behemoth – the US – for the $ 245 billion Indian IT industry. The quarterly results for the top three companies – Tata Consultancy Services (TCS), Infosys and HCLTech announced last week show that a larger percentage of their current growth is coming from the European region as growth from America is slowing due to macroeconomic concerns. Within Europe, the United Kingdom (UK) is consistently proving to be among the fastest growing markets for the industry.The country’s largest software exporter TCS said that the United Kingdom registered a 10.7% growth even as North America grew by a meagre 0.1% in revenues. Meanwhile, for the second largest IT major Infosys, Europe witnessed a year-on-year growth of 10.9% (5.4% in constant currency terms) while North America’s growth stood at 1.2% (1% in constant currency).

Infosys also expanded Europe’s market share to 26.5% in September 2023 from 24.7% last year. Meanwhile, North America share declined to 61.1% (September 2023) from 62.5% (September 2022).

For HCL Technologies (HCLTech) in July-September period, there was a slight growth in market share in Europe at 28.5% from 27.5% in September quarter last year.

In an interview with ET a day after announcing the financial results, TCS chief K Krithivasan acknowledged that the UK is certainly “one of the bright spots”. “…The UK is definitely looking strong and even from a pipeline as well as the order book perspective. But there are quite a few others… Within Europe, France and Germany are probably weaker… Benelux (economic union of Belgium, the Netherlands and Luxembourg) is strong, Nordics we are holding reasonably good and gaining more market share,” Krithivasan said.

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To be sure, North America continues to be the largest market for both TCS (48% share)and Infosys (61%). Indian IT firms account for more than half of the total revenues from this market, which is also the biggest spender on technology. The momentum however has got impacted since most clients are holding off on non-critical IT transformation projects given the uncertainty around an impending recession.

Over the past two-three years, the European market, especially the UK, is gaining traction in the revenue growth for the IT sector even as the share continues to grow gradually.

Moreover, the recent mega deal wins that have been announced by multiple large Indian IT Services players, majority of them are from Europe.

TCS won quite a few major deals in Europe, largely in the UK recently. It includes the $1 billion Marks & Spencers deal, $700 million Phoenix Group deal, Teachers’ Pension Scheme worth around $300 million, a couple of undisclosed deals with British Broadcasting Corporation (BBC) and UK’s National Employment Savings Trust (Nest) and the most recent multi-year partnership with British retail giant Asda, to name a few.

Similarly, Infosys signed deals with Liberty Global, British Petroleum, Nordic-based Danske Bank while HCL Tech partnered with German automotive engineering services company ASAP Group through the company’s UK subsidiary.

“Despite macroeconomic concerns, Europe is one geography that is showing a strong year over year growth for the last few quarters. This trend is visible across the sector for most of the companies. Within Europe, the UK is one of the markets with the strongest growth. Post Covid and after the Ukraine war (with Russia), Europe has started seeing an increased offshoring of IT services. There appears to be a structural shift towards offshoring that is benefiting IT Services companies,” said Kumar Rakesh, India Analyst – IT and Auto at brokerage firm BNP Paribas.

In the last quarter, HCLTech grew faster in Europe. Its CEO C. Vijayakumar had said that over a year on year basis, Europe grew 10.5%, followed by Americas at 7.3% and the rest of the world 6% decline in constant currency.

In the broader Europe, the Middle East and Africa (EMEA) segment, Europe’s largest sourcing market, the UK, generated more than $1 billion in managed services ACV (annual contract value) for the third straight quarter, clocking in at $1.7 billion of ACV, up 143 per cent year-on-year, as per an October report by ISG Index for the July-September quarter.

ISG Index, owned by Nasdaq-listed Information Services Group (ISG), is a marketplace intelligence on the global IT and Business Services Sector.

In the post earnings conference call in Q2 last week, responding to an ET question, Infosys CEO Salil Parekh said, “The Europe growth has been stronger than what we’ve seen in the US.” He added that in Europe, manufacturing and life sciences are growing along with some of the countries within Europe, which have had “stronger growth”. Infosys’ European business in Q1 had grown by 10% with operating margin for the quarter strong at 20.8% and robust free cash flow of $699 million in Q1.