The Hindu Business Line : IT’s wait and watch

What is the outlook for the Indian tech sector in the wake of the global slowdown? Analysts say a slow recovery can likely be seen towards the second half of 2009..

Vishwanath Kulkarni

The sub-prime crisis in the US that sparked off the first signs of uncertainty in the Indian IT industry has now snowballed into a full-blown economic slowdown across the globe, threatening to thwart growth for the sector.

Though industry players are cautious on the near-term outlook, analysts say a slow recovery could possibly be seen towards the second half of 2009, when the dust would begin to settle and a pick-up in technology spending is predicted.

“It could take at least another five quarters for things to return to normalcy from an IT perspective and potentially beyond that, largely due to the restructuring happening in the financial services industry. It also really depends on whether things worsen from here on not,” says David Furlonger, vice-president and analyst, Gartner.

Despite the economic downturn, research firms such as Forrester and Gartner expect a growth in technology spending for 2009. Gartner recently said though customers would reduce their IT budgets, the cut would not be as dramatic as the one seen during the dotcom bust. Gartner expects technology spending to increase by 2.3 per cent in 2009, down from its earlier estimates of 5.8 per cent.

Furlonger says most financial institutions have an IT spend in the range of 12-14 per cent. “It is extremely difficult to say how this ratio will change in the short-term. Cost cutting means that IT spend may decrease — but if revenues fall faster as a result of the current economic crisis, then the ratio could actually increase,” he adds.

Though the US and Western Europe will be worst affected among the developed economies, the emerging nations will not be immune, says Gartner.

IT budgets will not see more severe reductions because IT is embedded in running all aspects of the business.

Outlook for Outsourcing

Avinash Vashistha chief executive of Tholons Inc, an advisory firm, says the long-term prospects for outsourcing are intact. “We expect to see a pick-up in spending from second half of calendar 2009,” he adds.

“I believe the US economy will recover by mid 2009. The emerging economies will bounce back quickly and the company is gearing up for growth by investing in non-linear initiatives,” says Suresh Senapaty, chief financial officer, Wipro Ltd.

The US crisis has already slowed down the growth momentum for the Indian IT services companies over the past few quarters as customers delay their spending on deployment of new technology applications amidst worsening economic conditions.

The turmoil that intensified in the past four to five weeks had claimed victims of some of the large financial institutions such as Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual and Wachovia, which incidentally happen to be large customers of the Indian IT firms. The liquidation of some of these entities has shrunk the business for Indian IT vendors to that extent, while the shotgun mergers would change the outsourcing landscape, with some vendors gaining new business and others losing it.

Some of the vendors see opportunities in post-merger integration and compliance-related work arising from stringent regulatory processes. However, the impact of the meltdown is yet to be fully seen on these firms as yet.

“The real impact of the downturn is some 60 to 90 days away as companies affected by the turmoil need time to take stock of the situation,” says Sudin Apte, analyst and head of Forrester Research in India.

Earnings forecast

Reflecting changes in the market, large Indian vendors such as Infosys Technologies Ltd and Satyam Computer Services Ltd have pruned their earnings forecast for the rest of fiscal 2009, while some, such as Wipro Ltd, have predicted flattish growth.

A sharp fall in the rupee against the dollar did help the Indian IT firms to post better than expected results in local currency for the quarter ended September 2008. “The results obviously didn’t measure up in totality but were not as bad as expected. The second half of current fiscal will be worse than the first,” Vashistha adds.

The average profit growth for the top five Indian vendors — TCS, Infosys, Wipro, Satyam and HCL Technologies Ltd — stood at 21.64 per cent year-on-year for the quarter-ended September 2008, while their top line grew by 34 per cent.

For the rest of the pack that included some 14 small and medium-sized IT firms, the average profit growth was at 36.91 per cent, while their earnings grew by 25.34 per cent. Though the smaller firms continue to trail their larger peers in terms of top-line growth, they were ahead in profitability terms as foreign exchange losses impacted profits of some large firms such as TCS.

The large Indian firms that have a bigger exposure to the troubled banking, financial services and insurance (BFSI) sector were more affected than their smaller peers. The Indian vendors earn over a third of their revenues from the BFSI vertical and most of it is from the US. Sluggishness in BFSI has pulled down the overall growth momentum for some firms.

Focus on BFSI

Though vendors have seen some sporadic cancellation of contracts, the delay in decision making and the lengthy due diligence continues to haunt them. Having said that, the Indian vendors would continue to stay focused on the BFSI as financial services companies, the early adopters of outsourcing and the largest spenders on technology, stay ahead on the curve.

Though the consolidation among financial services companies is contributing to the uncertainty, it is creating transformational opportunities. Vendors say the troubled customers are now viewing IT as a way to transform their businesses and adopt operating models that are much leaner, besides eyeing faster returns for their investments in technology.

For example, Infosys signed some five transformational projects during the September quarter, while Wipro is moving away from the ‘business as usual’ approach to more of the ‘transformation’ approach through which it expects to realise better cost and service optimisation in times of need.

“There are enough clients to suggest that our services will be a significant part of the economic recovery process,” said S. Ramadorai, chief executive of TCS that earns over 40 per cent of its revenues from the financial services segment.

Client additions

Despite the uncertainty, vendors saw healthy client additions during the quarter. Except for the smaller troubled players such as Sasken and Nucleus Software that posted a negative growth in profits, other vendors have largely maintained their earnings growth.

“Although it will take a few months for a clear picture to emerge, we expect to see opportunities due to consolidation in the financial markets, especially for players like us in the domain and solution space,” says Arun Jain, Chairman and CEO, Polaris Software Lab. Polaris is participating in strategic initiatives of three among the top 10 banks in modernising their legacy platforms. Smaller companies such as NIIT Technologies and Sonata Software are tying to differentiate themselves by pursuing different growth strategies. While NIIT has been investing in non-linear service lines such as managed services and platform-based services, Sonata is focussing on outsourced product development and geographies such as Europe.

The current turmoil is the second such crisis affecting the Indian IT sector in less than a decade. Vendors who have grown in size and have a broad-based portfolio of service offerings are better placed to handle the crisis compared to eight years ago. (With inputs from Adith Charlie).

vishwa@thehindu.co.in

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