IT firms allay fears, but stocks take a beating

Our Bureau Mumbai | Updated on August 08, 2011

Will S&P's downgrade of the US have a material impact on revenues of Indian IT companies from this geography?

While top tier IT companies came out with statements today that sought to soothe investor concerns on this front, the damage was already done on the bourses from the start of trading on Monday.

Shares of bellwethers TCS, Infosys, Wipro and Patni – all of whom generate a lion's share of their revenues from the North American market – lost between two and six per cent on the BSE.

The worst impacted was HCL Tech, which shed 5.79 per cent to close at Rs 419. Mr T.K. Kurien, Chief Executive Officer of Wipro's IT business, is of the view that it is a tad early to make an assessment on the actual implication of the S&P downgrade of the US. Even if the downgrade were to have a negative impact, he feels that the India's software sector is better prepared for macroeconomic changes today than it was in 2008.

“In fact the structural weakness in the economy offers opportunities to IT services companies, as we help global corporations variabalise their IT, thus making them fundamentally more adept to compete,” said Mr Kurian.

Mr N Chandrasekaran, Chief Executive Officer and Managing Director of Tata Consultancy Services, said his company was “watchful of the evolving global situation” but did not see “any changes in the business demand environment in North America and Europe.”

Some analysts feel the downgrade could impact the US financial system and hence cause tightening of IT spending by the BFSI sector, which brings in over 40 per cent revenue for the Indian IT sector.

“The biggest impact could be if the US dollar is devalued and RBI also chooses to allow the Indian rupee to appreciate in comparison. This will definitely hit the Indian export sector as a whole and IT services in particular as almost 70 per cent of the revenue composition of this sector is exports,” said Mr Glen Serrao, Engagement Manager, Zinnov Management Consulting.

At a time when domestic credit is unviable, thanks to the RBI's strict monetary tightening, foreign money is the only recourse. The latter has been at least 5-7 per cent cheaper than domestic debt and the hedging costs have also been low. However, the US rating downgrade will cause interest costs to spiral up thereby increasing costs associated with raising funds for acquisition-hungry Indian IT companies, said Mr Ganesh Natarajan, Vice-Chairman and Chief Executive Officer of Zensar Technologies.

Indian software firms generally acquire assets in overseas markets to get access to strategic customers.

Published on August 08, 2011

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