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Turnaround at least a year away for IT firms

By Leslie D'Monte in New Delhi
December 08, 2008 11:22 IST
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The last couple of months have dealt a severe blow to IT firms, which has even prompted the top listed Indian IT services providers to inform investors that they need to scale down their growth expectations from the sector that, on an average, has been growing almost 30 per cent year-on-year.

Consider this. Kris Gopalakrishnan, CEO of Infosys Technologies, the country's second largest IT services provider, himself said the IT-BPO sector will grow only by 15 per cent this financial year (a couple of months ago, software body Nasscom had pegged the growth in the 21-24 per cent range).

And for the first time ever, the Indian tech bellwether has frozen its hiring plans for the next financial year. India's largest IT services provider Tata Consultancy Services has also revised its capital expenditure (capex) plans for the current financial year.

Sudin Apte, a senior analyst at Forrester, says, "It's not surprising since we had predicted the sector's growth rate to range between 15 and 18 per cent." Siddharth Pai, partner & managing director, TPI India, remarks, "We have not reached the bottom yet. The announcements from IT firms are a clear indication that the days of unbridled growth are over. Of course, another reason is that you cannot expect companies to continue with these growth rates as they grow larger."

The problem is that over 90 per cent of Fortune 500 players have already outsourced their application, development and maintenance work to Indian players, notes Nishant Verma, VP of advisory firm Tholons Capital. Besides, new business is hard to come by.

The larger players though have deep pockets, which is expected to see them wade through the crisis. The top four IT firms, for instance, have enough cash to pay their employees for 4-10 months even in the unimaginable situation of not getting any additional revenue.

Both Infosys ($1.7 billion) and Satyam ($1.15 billion), for instance, have enough cash to pay their employees for 8-9 months, assuming that they don't get any additional revenues, according to a Edelweiss Securities report. TCS, however, has cash ($0.9 billion) to pay its employees for only 3-4 months, according to the report. Wipro, on its part, has enough cash ($1.3 billion) to pay its employees for 6-7 months.

Nevertheless, the short- and mid-term bearish sentiment stems from the fact that the US and UK account for almost 80 per cent of revenues of all Indian IT firms. The crisis has spilt over to the UK, too, where Indian IT firms were finding succour by derisking geographically.

Moreover, the banking, financial services and insurance vertical, which has been affected the most by the sub-prime crisis, accounts for slightly over 40 per cent of the total revenues of the Indian software sector.

This results in re-negotiation of pricing, and further lag in deal-making.

"Now IT firms will need to have more domain knowledge and broad-based capabilities to get additional work," says Verma of Tholons Capital, adding, "But as an advisory firm, we are seeing an upsurge of activity to outsource even some complex work. This gives us confidence that the IT business should start looking up again in the next 3-4 quarters."

Pai of TPI and Apte of Forrester concur with this point of view.

All analysts are positive, though, that the Indian IT services providers will recover faster than the other sector firms that have been battered in the slowdown.

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Leslie D'Monte in New Delhi
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