Over the last two or three years, the signals from the telecom sector around the world have been quite weak. For Indian IT companies, which are dependent on clients in this segment, the impact has been even more pronounced.

Indian IT majors such as TCS, Infosys, HCL and Wipro, who derived 15-30 per cent of their revenues from telecom clients prior to 2008, have seen that proportion reduced to 10-25 per cent. The effect on single vertical players such as Subex, Sasken Communications and Tanla solutions has been severe. But Tech Mahindra and to some extent OnMobile Global have managed to come out of the mess, thanks to their focus on emerging markets.

IMPACT OF SLOWDOWN

Clients from the telecom vertical fall into several categories. These include mobile service operators, network equipment manufacturers, chip/OEMs who can be categorised as semiconductor players and finally mobile phone producers. These are areas where Indian IT majors and Tech Mahindra deliver end-to-end services to their clientele.

As a sub-segment, mobile service providers, Indian and global, engage the likes of OnMobile, Bharti Telesoft and Tanla Solutions for providing value-added services such as ringtones, content downloads and many other SMS-based services.

During 2008-09, as a result of the tight credit environment and due to the general paralysis of consumer confidence, network manufacturers such as Alcatel, Nokia Siemens and Ericsson reduced fresh capex investments between 10-40 per cent. Motorola too was low on spends and Nortel Networks filed for bankruptcy. It did not help that telecom handset manufacturers such as Sony Ericsson and Motorola were all looking at dwindling demand and looking at cost reduction exercises.

From the operators' side, British Telecom, a large client for Tech Mahindra and top IT companies, too was outsourcing much less with no large deals being signed. Indian vendors such as Sasken Communications faced the brunt as they cater to semiconductor companies and handset manufacturers. Nokia's troubles with declining market share in many of its segments had a telling effect on small and to some extent large Indian vendors.

While the decline in telecom was somewhat offset by the traction in BFSI (banking, financial services and insurance) vertical for the top IT companies, smaller players such as Subex took a severe beating with a more than 50 per cent cut in revenues and profits. Mid-tier players such as MindTree too were affected, though less significantly. MindTree ventured into smart phone manufacturing but quickly wound up.

ROLE OF NEW MARKETS

While large deals were not forthcoming in the developed markets, the middle-east, Asia and Australian regions emerged as key outsourcers from late 2009. For example, mobile operators such as Etisalat DB, Saudi Telecom and more recently Vodafone Australia have outsourced deals worth $50-400 million to Tech Mahindra. Telstra, a leading operator in Australia, continues to engage Infosys and other global majors such as IBM and EDS.

Large American operators too have emerged as key clients in engaging Indian vendors for value- added services.

Developed markets, too, are seeing a mild revival. AT&T in recent times has enhanced relationships with Tech Mahindra. BT and Vodafone in the UK are slowly back on the growth path after rounds of cost cutting. An analysis of reports from these companies suggests that average revenues per user (ARPU) have been quite stable over the last couple of years. Increasing focus on pre-paid connections has eased any possible credit concerns.

So it would be a matter of time before these operators outsource operating and business systems to Indian IT vendors, just as mobile players in the emerging markets did.

OnMobile Global and Bharti Telesoft, among the largest VAS (value added service) providers, have increasingly tried to focus on growth markets overseas, such as Africa and Latin America. OnMobile derives over 20 per cent of its revenues from overseas markets. It has signed multi-year deals with Vodafone (Africa) and with Telefonica for providing VAS services to Latin American subscribers. Latin America has a mobile penetration of 83 per cent, which creates a larger market for selling VAS products.

Further, countries such as Brazil, Mexico, Chile, Argentina, and Venezuela generate an average revenue per user (ARPU) of anywhere between $10-30. This is substantially higher than the $4-5 ARPU that the Indian market generates for its operators. The revenue share with operators such as Telefonica would thus be more lucrative for OnMobile. Bharti Telesoft too has increased focus on Latin America. These operators along with newer ones such as One 97 may also benefit from the stabilising ARPUs in India as a result of bottoming out of the tariff war here.

TELECOM SPURS RECOVERY

For others in the telecom segment, too, the path to revival seems to have started, with Infosys and others indicating that a revival in the investment cycle of equipment players is on cards.

The Semiconductor Industry Association has stated recently that worldwide semiconductor sales for 2010 reached a record $298.3 billion, a year-on-year increase of 31.8 per cent. It also states that the Asia-Pacific region accounts for 54 per cent of the sales. With the region being a fast growing market where newer electronic devices such as smartphones and other gadgets, the services that associated with these would also expand. According to a recent report from Gartner, the telecom equipment market is poised for the strongest growth in 2011, with worldwide telecom equipment spending forecast to grow 9.1 per cent to $465 billion.

The IT portion outsourced to Indian IT vendors would grow at a faster clip, though it may not be at the same pace as 2007-08, of 25 per cent plus levels.

Clearly, the worst appears to be over for at least for the top IT players, though smaller players may find it difficult to win deals in a scenario where clients are reducing the number of vendors that they are working with.

The proposed acquisition of T-Mobile by AT&T for $39 billion in the US too is expected to be positive for Tech Mahindra, TCS, Wipro and Infosys as opportunities arise from integration of systems. Some of these vendors and others such as Cognizant count both AT&T and Verizon as clients, which means a greater share of the outsourcing pie.

Wipro Infotech has also managed to bag large deals from domestic operators such as Unitech Wireless and Aircel.

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