The Hindu Business Line : Still ticking

The September quarter numbers of the IT services firms indicate that the demand environment for IT offshoring and outsourcing continues to be strong, notwithstanding concerns over a looming slowdown in the US, the largest IT market.

Indian IT services firms, which largely escaped unscathed by the turn of events relating to the sub-prime crisis in the US, reported a robust growth, aided by strong volumes, healthy client additions and continued pricing up-tick.

The impact of the sub-prime crisis on the Banking, Financial Services and Insurance (BFSI) verticals of the Indian IT firms has been discounted now, especially after all top-tier firms reported robust growth in BFSI that accounts for a significant chunk of revenues for most of them. In fact, for the top two exporters TCS and Infosys, the BFSI practice grew faster than the company average during the September quarter.

IT spends outlook not clear

Though the IT firms largely maintain that the slowdown in the US has not affected them till now, the outlook on the IT spends of US firms for 2008 is not clear as companies expect their clients to freeze their budgets towards end-December or early January.

“We have not been affected by the slowdown” said the Wipro Chairman, Azim Premji, at a post-earnings conference. “My personal judgement is that you will see no effect on us on account of the slowdown in the US or any other geography. It is only the uncertainty that really affects the Indian software and BPO industry.

If the US or European economies are strong and booming, it means more business. If these economies are going through some amount of recession, it means companies operating in these economies are under huge economic pressures to be able to deliver profit commitment. Their top managements tend to drive cost takeouts more aggressively, which means more business of IT services and BPO coming to lower-cost, more value-driven destinations such as India,” Premji said.

Cautious watch

While it is too early to take a call on the likely impact of a possible slowdown on the IT budgets, companies largely expect that they are likely to stay flat or remain neutral compared to the 2007-level, based on their initial interactions with their clients. Currently, there appear no indications from the Indian IT firms that they preparing for any kind of a slowdown in the US.

“Demand is strong and will remain strong as we don’t see any macro issues impacting the scenario over the next five years,” says Avinash Vashistha, CEO of Tholons, an IT advisory firm.

But, there is a possibility that discretionary budgets could get tightened, which, in turn, would mean there will be fewer short-term projects, which may impact the small and medium-sized companies. “While things are not bad as yet, people are being cautious” he adds.

“Clearly, there is no slackening of demand, though people are talking of a slowdown and cut in discretionary spending,” says Krishnakumar Natarajan, President and CEO of MindTree Consulting’s IT Services business. Though there are no dramatic cuts expected, people are keeping it close. But, says Natarajan, client visit momentum is picking up. “There is at least 15-20 per cent rise in client visits from both existing and new clients,” he adds.

Robust hiring

Also, some of the Indian IT firms have revised their earnings forecast marginally upwards for the rest of the financial year 2007-08, indicating that they are witnessing strong demand for outsourcing services.

This is further accentuated by the fact that the hiring outlook for 2008-09 remains robust as campus offers made by almost all top-tier companies were at a record high. Largest exporter TCS, which achieved a milestone of crossing the one-lakh mark in terms of employee headcount during the September quarter, added 12,523 employees on a gross basis during the quarter. TCS has made some 22,000 offers across 465 campuses in India, scheduled for joining in 2008-09, the highest in recent times.

Similarly, Infosys made some 18,000 campus offers, 40 per cent more than last year while Wipro made 14,000 offers.

Moreover, the hiring outlook for the rest of FY08 also remains strong and companies such as Infosys have raised their projections for the year.

Infosys, which initially said it would hire about 28,000 people, has now revised the figure to around 30,000.

The robust hiring and the outlook in terms of campus offers clearly demonstrate the fact that these companies are not preparing for any kind of a slowdown, going forward, while attrition for almost all the players appears under control.

The deal pipeline also remained strong for almost all vendors. TCS struck the largest-ever deal by any Indian vendor during the quarter by signing up ACNeilsen for a $1.2 billion 10-year contract and is chasing about 20 deals, which are over $50 million.

Infosys, Wipro and Satyam too said they are chasing multiple large deals. The top-tier vendors reported a price increase of anywhere between 2 and 6 per cent during the quarter.

Bracing against rupee

Notwithstanding the positive commentary by the managements on the outlook, despite a robust Q2 performance, wage inflation of around 12-15 per cent and external non-operative factors such as currency volatility continue to weigh on the Indian IT sector.

“What’s more bothering us is the rise of rupee against dollar and we are busy devising strategies to derisk,” says Natarajan.

The volatile currency continues to be the most worrisome factor for the industry as the movement of rupee is not predictable and the billing of these firms largely is dollar-denominated.

Efforts to shift billing to other currencies such as the Euro or British pound have yielded no major results.

Unlike in the June quarter, the industry did not witness a sharp impact of rupee on the earnings in the September quarter, vendors are realising that they have to live with a volatile currency.

The rupee has appreciated significantly against the US dollar since the beginning of the year, and with capital inflows expected to stay strong, the rupee is likely to stay firm in the near term. The rupee, which was hovering around the 45 levels against the dollar at the beginning of the year, breached the 40-mark and the projections for third-quarter are based on Rs 39.50.

The top-tier vendors are seen bracing for a stronger rupee and are seen prepared for a gradual appreciation and not a sharp movement as one witnessed in the first quarter of this fiscal.

IT firms are seen broad-basing their markets by diversifying to non-US geographies such as Europe, Japan and the Asia-Pacific, including India.

While TCS and Wipro have a large presence in the Indian market, Infosys has finally woken up to the potential in the domestic market and has set up a separate business unit to tap the Indian market.

Expanding footprint through M&As

While the US continues to be the largest market, revenues from other geographies, especially Europe, are on the rise.

Further, Indian IT firms are seen more aggressive in terms of expanding their global footprint through mergers and acquisitions.

Since the beginning of the year, the Indian IT space has witnessed two deals being stuck every three days (about 175 deals in the first nine months valued at $3.59 billion), according to research firm Grant Thornton. The biggest deal till date is Wipro’s takeover of Infocrossing Inc for $600 million.

Also, Indian vendors are enhancing their global delivery footprint by setting up more centres overseas and hiring more people locally for their near-shore centres. Mexico, Eastern Europe and the Philippines are emerging major destinations for Indian firms setting up global delivery centres overseas.

Enhancing global footprint not only helps these firms to take some pressure off their rupee-based cost structures but also gives them some advantage in terms of bidding for government contracts overseas.

Indian vendors are better placed presently to face a slowdown as compared to 2001. This is because outsourcing has turned out to be more strategic for global clients. Whether the budgets remain flat or change, Indian vendors stand to benefit as clients would look to control their costs by outsourcing or offshoring. The Indian IT industry is hedged both ways.

But it is a wait n’ watch game as to how the market scene evolves in the next three months or so.

vishwa@thehindu.co.in

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