Global meltdown catches IT firms off-guard

December 28th, 2008 - 1:39 pm ICT by IANS  

Bangalore, Dec 28 (IANS) After nearly a decade of uninterrupted boom, the Indian information technology industry finds the road ahead bumpy as 2008 draws to a close, with the global meltdown and financial turmoil in the US and other rich countries catching the otherwise resilient sector off-guard.With no signs of early revival, even the top firms - TCS, Infosys and Wipro - are bracing for hard times in the year ahead.

A reality check of the industry by leading IT industry-specific publication Dataquest of Cyber Media shows that the Indian software services sector is set for a lower growth this fiscal due to declining IT spends by enterprises worldwide and a volatile currency market.

“The global economic slowdown is impacting the Indian software services sector as never before. With the US, Europe and Japan slipping into recession, demand for outsourcing and offshoring IT services will slacken over the next three-four quarters,” Dataquest warned.

Though the software industry body Nasscom projected 21-24 percent revenue growth rate for this fiscal as against 28 percent in 2007-08, analysts fear the annual growth could decline to 15 percent by the end of the fiscal - the lowest in a decade.

Nasscom president Som Mittal said the growth rate target would now be reviewed in January, as the member-companies were in the process of furnishing fresh data to the representative body.

“We wanted to review the forecast in mid-December but could not do so as export and domestic firms are still assessing the situation. We will re-visit the numbers and give a revised forecast next month,” Mittal told IANS.

A performance review of the top 20 Indian IT firms shows the projected growth rate of 28 percent may not be met.

“The slowdown is likely to last 12-15 months. New application development is expected to be affected the most. Smaller companies looking for funding are equally affected by the tight credit market, while the large outsourcing firms/IT bellwethers are sitting pretty on cash on their balance sheets,” Dataquest said.

According to global technology and market research firm Forrester, slowdown in the technology sector will continue till the third quarter of 2009, while outsourcing growth will remain moderate till 2010.

“Slowdown will force companies to turn to vendors to help cut costs. Growth in IT outsourcing revenues will remain moderate due to the use of lower-cost offshore resources and smaller-scale outsourcing deals,” Forrester said in its report “Outlook for the global IT industry”.

“Unlike in the first two quarters (April-September), clients have put discretionary projects on hold in the third quarter. Decisions on new projects have been postponed to next year, as clients are busy grappling with the ongoing crisis,” the report said.

Bearish sentiment in the US and British markets, which account for about 80 percent of the Indian IT export revenues, are compelling vendors to tap emerging markets.

According to Dataquest, the meltdown also impacted projects in the banking, financial services and insurance sectors, which contribute about 40 percent of software sector revenues.

“Coupled with recession, the prevailing negative sentiment is also affecting new projects in manufacturing and retail verticals, which account for 15 percent and eight percent of the total revenues,” it added.

To sustain the growth momentum, albeit more slowly, Indian IT vendors are shifting to fixed price model from time-and-material billing model. Infosys, Wipro and HCL are moving away from billing customers by the hour to entire projects or in parts to maintain their profitability, as fixed price contracts give flexibility to drive productivity and protect margins.

In the second quarter (July-September), fixed price contracts accounted for 34 percent of the combined business of Infosys, Wipro and HCL, as against 29 percent in the same quarter the previous fiscal. TCS has been sustaining on fixed price contracts, which accounted for 44 percent in the last quarter.

The currency volatility has also compounded the woes of the Indian IT sector.

If a rising rupee in the last fiscal had dented export earnings, the steady rise of the US dollar against the rupee, British pound and Euro during the second quarter (July-September), impacted revenue realisation in dollar terms since 30 percent of the billing is done in these currencies.

“The sharp and sudden appreciation of the US dollar against the rupee by 5.5 percent, euro (13 percent) and pound (13.8 percent) in the second quarter had adversely impacted the revenue of Indian IT firms in dollar terms,” Dataquest noted.

As a result of over-hedging in forward contracts, benefits of a weak rupee were limited. For instance, Infosys posted a market-to-market loss of $28 million (Rs.1.35 billion) on hedging $932 million for the entire fiscal.

Similarly, Wipro suffered a forex loss of Rs.280 million in the second quarter on hedging $2.1 billion, while HCL took a hit of Rs.970 million.

On the other hand, multinational companies proved to be resilient.

“Having consolidated their presence in the hardware segment, thanks to a liberalised import regime and lowered tariffs, global brands such as Dell and Lenovo have outperformed their Indian counterparts even in these times of slowdown,” the Dataquest report said.

Similarly, in the software segment, global majors like Microsoft and SAP registered revenue growth of 29 percent and 104 percent respectively last fiscal, and continue to grow despite the slowdown.

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