Auto sector is becoming the next BFSI for India’s IT services firms
remained constant since FY20), earned $559 million from this segment in the December 2023 quarter, up 72% over $325 million earned in Q3FY20. Banking’s share of its revenue has also remained constant since FY20 at 21%.
HCL is expected to announce its FY24 results on Friday, 26 April, but a Bloomberg estimate of 39 analysts expects its FY24 revenue to be $13.2 billion, potentially marking a 33% growth in four years. That would be less than half the pace at which its ER&D revenues have grown.
India’s largest IT services firm, TCS, is the only outlier among the top three, with its net revenue growing faster at 32% in four years compared to 15% growth for the manufacturing vertical.
The analysts cited above estimate that Infosys’s latest quarterly revenue from automotive clients would be around $235 million or 5.2% of its net quarterly revenue.
For HCL, estimated automotive revenue for the December quarter was $170 million, which, too, is around 5% of its quarterly revenue. For TCS, automotive revenue as of the March quarter was around $195 million—around 2.5% of its net quarterly revenue.
TCS and Infosys did not immediately respond to emails about their automotive clientele. HCL Technologies declined to comment, citing a silent period ahead of its earnings on Friday.
A lot of growth in automotive businesses can be attributed to acquisitions and mega deals that the large-cap IT firms have signed. Last week, Infosys made its biggest acquisition when it agreed to spend $480 million to buy In-Tech, a German automotive ER&D firm. In-Tech reported $180 million in revenue last year.
Significantly, Infosys’s acquisition of In-Tech comes three years after the company bagged an over $3-billion deal, its biggest, for eight years from German car maker Daimler AG in December 2020.
Noida-headquartered HCL spent $260 million last year to buy ASAP Group, a German automotive engineering services company. HCL in January guided to grow between 5% and 5.5% in constant currency terms, implying its growth would be more than that of TCS and Infosys, which grew 3.4% and 1.4%, respectively, in constant currency terms.
HCL also managed to clock the fastest growth back in 2020. At the heart of its impressive performance has been its acquisitions and its bet on the ER&D space, which the numbers clearly reflect, too.
Industry reports and analysts project automotive to be a strong contributor to the nearterm growth of IT services firms. On 16 February, industry body Nasscom said in its Annual Strategic Review, 2024 that ER&D will be the fastestgrowing vertical for the industry in FY24, growing at 7.4% year-on-year (y-o-y), as against the net industry revenue growth of 3.8% y-o-y.
“With digital imperatives and the resurgence of AI, ER&D maintains its concentration on digital engineering. Domains like aerospace and software-defined vehicles, autonomous driving, and digital connected solutions are driving growth,” the report said.
“Globally, 5-6% of all ER&D operations by automotive firms are outsourced, and a further 4-5% is done through joint ventures in global capability centres (GCCs) that have come up majorly in India,” said Apurva Prasad, vice-president of institutional research at brokerage firm HDFC Securities.
“This is largely due to the sensitivity of intellectual property that automotive firms own. However, most automotive firms do not have the kind of software capabilities that are needed for reinventing the wheel, which electrification of vehicles (EVs) and SDVs necessitate,” Prasad said.
BNP’s Rakesh added that manufacturing companies had under-invested in technology so far. “The covid-19 pandemic lockdowns pushed automotive companies to a just-in-time manufacturing model. This needed technology investments for supply chain modernization. Automotive companies are also going through a once-in-a-century disruption in order to invest in EVs,” he said.
“This transition of entire portfolios is causing an elevated level of tech spending across the industry. While this is happening, many automotive firms are struggling to ramp up their tech workforces in-house.”
Prasad further pointed out that smaller IT services firms, which are not as broad-based as their larger peers, have focused strategically on the automotive engineering sector to continue to grow in revenue in FY24.
Pure-play automotive engineering firm KPIT Technologies earned $428 million in net revenue between April and December last year. This is a 46% y-o-y growth for the ninemonth period between FY24 and FY23—and is already higher than the full-year revenue of $418 million that the company earned in FY23.
Three experts who closely watch the sector said that KPIT Technologies is likely to grow at an organic growth pace of over 25% this year, and nearly 40% including acquisitions it made this year.
“Strong growth posted in the past two fiscals by mid-cap companies with a clear focus on automotive engineering clearly reflects how the automotive ER&D vertical is a strong growth avenue in the nearterm,” Prasad said.