Tackling the ‘New Normal'

The year started with a wave of protests sweeping through West Asia and North Africa. First Tunisia and Egypt erupted in mass protests. Then the political unrest spread to Iran, Bahrain, Yemen, Algeria and Libya. In March, the world watched with horror as a devastating earthquake and tsunami rocked Japan, causing wide-scale destruction and stoking fears of a radiation leak.

And now, the outlook for the US economy seems all shaky with murmurs of a double dip growing louder each passing day. As it is, Europe's economic and fiscal strain shows no signs of lifting.

Morgan Stanley, in fact, cut its global growth forecast for this year and said the US and Europe were dangerously close to a recession.

‘A new normal' is how NV Tyagarajan, President and CEO of the largest Indian BPO, Genpact, terms it, and aptly so. “The world seems to have become more uncertain, in general. And companies should get used to it as part of their lives,” he said, after Standard & Poor's decision to downgrade US sovereign credit rating, earlier this month.

So what do the unfolding economic uncertainties, particularly the weak macro indicators in the US, mean in terms of business volumes and decision-making cycles? Will they hit client IT budgets for 2012 and 2013? Will the scene echo the 2008 recession?

Over the last few days, analysts and market watchers have warned of a possible slowdown in volume growth, although many still seem to believe that it will not be a 2008-repeat, when bleeding clients had brutally cut tech spends.

“This is significantly different from 2008, when we had seen failure of the financial system,” says Sid Pai, partner and MD of sourcing advisory firm, TPI.

True, no one is pressing the panic button just yet. But then, given that 80 per cent of India's IT-BPO export revenues hinge on the health of the US and European economies, worry lines are definitely deepening. On August 19, IT stocks, once again, fell on fresh worries of a possible double-dip recession in the US and the spilling Euro zone crisis.

The pessimists see black clouds…

Infosys Technologies reportedly told analysts recently that customers are “cautious” but they are not taking any extreme steps. Neither has it seen any cancellation in projects. But, then, demand for outsourcing in some sectors, such as manufacturing, retail and telecom, could be soft.

Standard Chartered Equity Research believes that a repeat of FY 08-09 (read sharp volume fall along with rate card cuts) is “unlikely, barring an event risk”. Fiscal 02-03, it says, could be a better proxy. In the immediate term, it says, the sales cycle time could go up and impact the H2FY12 volumes. But it also expects that 2011 IT spends will be below budget, and cautions that large transformational programmes could see revaluation or componentisation.

Another brokerage, Nirmal Bang, has taken a harsher view. In an August 12 note, analyst Harit Shah goes against the common refrain that the current situation is not as bad as 2008 and clients being better prepared for the slowdown now. A difficult year is what the sector should brace for in calendar 2012 and fiscal 2013, he writes.

“…We expect the worsening economic scenario to lead to a slowdown in volume growth of Indian IT firms in FY13,” the analyst note says, cutting its FY13 revenue estimates of top-tier IT stocks (TCS, Infosys, Wipro and HCL Technologies) by 4-11 per cent.

Forrester too has said that the impact of the financial news trickling in, on the US and global tech markets, would be slower growth in 2011 though it will still be positive growth (since half a year of good growth for 2011 is already captured). It anticipates growth to slow down further in 2012.

Andrew Bartels, VP and Principal Analyst of Forrester Research, says that “assuming that slower growth but no recession actually occurs, our forecast is looking like 6-7 per cent growth in the US businesses and Government purchases of IT goods and services, in both 2011 and 2012 — with 2012 growth lower than 2011 growth.”

At the same time, Forrester said that the risks of a US recession that spreads to Europe, Canada, Latin America and parts of Asia have increased to around a 30 per cent probability.

… the optimists look at silver lining

But there is hope. Bartels himself points out that July employment growth rate of over 1,00,000 was decent, suggesting some positive momentum in hiring. “So, the odds still favour the US and Europe skirting the edge of recessions but not falling in,” he concludes.

Moreover, business executives have shown a high willingness to invest in IT in order to keep profits growing faster than revenues.

Tyagarajan of Genpact argues that the “new normal” confronting all global corporates may actually work in favour of IT firms because it would prompt clients “to create more flexibility in their business models and operations, and allow variability in cost structures and capacity planning”.

Outsourcing to experts, by its very definition, would provide such flexibility, he says.

That argument also resonates in the software association Nasscom's stance on the issue. It emphasises two points — one, that cuts in US Government spending as an offshoot of the recent crisis will not impact the Indian IT industry, given the low exposure to Federal projects. Two, that in case of an economic slump, it sees the Indian IT industry strengthening its partnership with the US customers to build-in greater business efficiencies.

American companies, per se , seem to be doing well and have cash in hand. “The US businesses are in good shape…Unlike last time when the liquidity was impacted, the current crisis, so far, has not affected businesses,” observes the MindTree CFO, Rostow Ravanan.

Ravanan believes that the Indian IT industry, at least in September and December quarters, will maintain the same trajectory, where volumes and pricing are concerned. That is also the time when clarity will emerge on just how the tech Budget will shape up for next year. “If nothing further goes wrong, the probability may even be that IT spending could see an uptick, buoyed by cloud computing and refresh cycles. On the other hand, if there are negative events, spends could become conservative,” he says.

Which way these winds eventually go is something we won't know for certain for at least another two-three months. What is clear, though, is that Indian companies need to be geared for buffeting by the gales. More so, perhaps, the IT industry.

>moumita@thehindu.co.in

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