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Vishwanath Kulkarni
Shamik Paul

Uncertainty will continue to haunt the Indian IT sector for the year ahead even as companies desperately await clarity on downturn-hit customers’ technology spends.

The latest quarter earnings brought in little cause for cheer as many large vendors reported earnings de-growth for the first time ever, while forecasting a bleak outlook for the year.

Indian vendors, for the past few quarters, have been facing challenges in managing growth as customers reeling under the impact of the economic meltdown have either pared or are undecided on their technology budgets, while some have even cancelled their ongoing projects.

“The amount of uncertainty is unprecedented. This is perhaps one of the worst times we have seen in our lifetime,” says the Infosys CEO, S. Gopalakrishnan. Infosys, which saw a negative profit and revenue growth for the first time, expects a decline of 6.7 per cent to 3.1 per cent in its dollar earnings for the year ahead.

Compared to the previous meltdown in 2001, the current crisis has affected many sectors — such as financial services, manufacturing and automotive — and is expected to have a far reaching impact on the export-driven Indian IT sector, resetting the growth rates and profitability parameters.

While witnessing de-growth in their earnings, vendors are also under pressure to maintain their profit margins. To sustain profits, companies are moving more work offshore, and converting time and material projects into fixed price ones, while freezing wage hikes and recruitments.

Volatile currency movements have emerged as a big challenge in recent quarters for Indian vendors, who earn about a third of their revenues in other major currencies such as GBP, the Euro and the Australian Dollar. The US dollar has emerged stronger against these currencies in the past year, thereby shaving off earnings.

Vendors have also been forced to pare their prices by as much as 5 to 20 per cent by way of price discounts. After witnessing a bull-run in pricing for the past five to six years, Indian vendors face pricing pressure and expect it to continue for the rest of the year ahead. The earnings of smaller vendors such as Zensar Technologies and Sonata Software have also been impacted.

“The results were no surprise. That there has been a significant weakness in the last few quarters is very clear and the impact was evident in the results,” says Siddarth Pai, managing director of advisory firm TPI Inc’s India operations.

Sectoral differences will also be a determining factor, adds Pai.

For example, Wipro has less exposure to the troubled banking and financial services (BFSI) sector and more on the infrastructure management side. The impact will, therefore, be less on Wipro, points out Pai.

Interestingly Wipro outperformed larger rivals TCS and Infosys, while sounding optimistic about the recovery process.

“We are more optimistic today than we were four weeks ago,” says the Wipro chairman, Azim Premji.

“There is some amount of stability and the huge uncertainty has been significantly mitigated,” he says. Wipro is more optimistic about the Indian and the US market at present, while it is cautious about Europe and Japan.

Compared to its larger rivals, Wipro sounded more confident about its pipeline. “The pulse one gets is that the funnel is robust and the performance depends on how many customers we win and how quickly we close the deals,” says Suresh Vaswani, joint CEO of Wipro’s IT business. “The real manifestation of what is going to happen in the next few quarters is the deal pipeline. I would believe the third and the fourth quarter looks better based on the deal pipeline,” says Vaswani.

It is not that the Indian vendors are the only ones to be impacted by the market conditions. ‘Big Blue’ IBM reported an 11 per cent fall in revenues, hit by declining sales and currency volatility.

Though the Indian vendors managed to add new customers during the quarter, the pace of generating new business has slowed down considerably. “The velocity of business has come down,” says Gopalakrishnan, adding the company has not seen cancellations but seen delay in project restarts.

Reflecting slowing business environment, the TPI Index revealed that the total value of contracts signed in the March quarter was the lowest since the first quarter of 2001. The TPI Index, a quarterly snapshot of the global sourcing industry, measures outsourcing contracts greater than $25 million. The Index showed that 141 contracts were signed during the March quarter, mainly in America and Europe with a total contract value (TCV) of $19 billion, down by a fifth over the previous quarter and last year. TPI said the annual contract value (ACV), which is TCV divided by the duration of the contracts, reached nearly $4 billion in the quarter, down 18 per cent quarter-on-quarter and 27 per cent year-on-year.

HCL Technologies led the large vendors in terms of winning large contracts in the recent past from customers such as Xerox, Nasdaq and Microsoft, among others. The total value of new contracts signed by HCL stood at $250 million in the quarter.

“The March quarter has been the worst quarter as most companies did not finalise their discretionary budgets. The issue is not about new deals, but about how you handle the surprises... For example, an existing client could go bankrupt,” says N. Chandrasekaran, chief operating officer, TCS.

Striking a positive note on the deal conversions, Chandrasekaran says the conversion cycles are becoming normal. “Deal conversions and ramp-up rates are likely to be better and normal this year across all sectors compared with the previous year,” he says. According to Chandrasekaran, the financial services industry is showing some signs of recovery. However, the company would like to watch the market over the next quarter before it feels comfortable that the recovery is going to happen this year.

However, TPI’s Pai expects the sluggishness to continue as the macro economic environment has been severely impacted. “I expect it to continue for one more quarter, if not more,” says Pai.

Interestingly, sectors such as media, retail, utilities and telecom are all increasing their outsourcing activity amidst the current economic downturn as they face pressures to cut costs, says Pai, adding there’s an increase in the smaller contracts. However, the deal conversion cycle remains elongated. “It is taking longer for contracts to convert and the conversion cycles are much longer,” Pai says, adding the deals are taking about nine to 12 months to convert, as against the normal six to nine months.

Though the deal momentum has been sustained, analysts say it is too early to spot a recovery trend. “There will be an uptake at some point of time, but the question is when? There are signs, but we do not know when the dam will burst,” says TPI’s Pai.

Wipro’s Vaswani says the recovery could set in the second half of current fiscal, while Infosys’s Gopalakrishnan says he is yet to see the signals from his customers, who believe that there will be a decline in spending and IT budgets.

vishwa@thehindu.co.in

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