Hyderabad: India’s top information technology (IT) firms will likely drag growth in the sector for at least three years, the research arm of US bank Goldman Sachs said in a recent report.
Also See Losing Edge (Graphic)
The firm blames the declining technology budgets of US and European clients—who contribute to at least 60% of the revenues for the country’s top IT firms—increasing competition from companies such as International Business Machines Corp., and the inability of local firms to move up the “IT services food chain”.
“Our growth expectations are modest and currently pegged at average 3% for fiscal 2010-12 (constant currency), including what is now expected to be a negative growth year in fiscal year 2010,” Goldman Sachs analysts Julio C. Quinteros Jr. ad Vincent Lin said in their 30 April report, released to the media on Monday.
That forecast for India’s top software exporters—Tata Consultancy Services Ltd (TCS), Infosys Technologies Ltd, Wipro Ltd, HCL Technologies Ltd, Cognizant Technology Solutions Corp. and Patni Computer Systems Ltd—is sharply lower than the average 27% growth these companies registered from fiscal 2007 to 2009.
It’s also slower than the 15% growth that Nassom, an industry lobby, sees for the industry through fiscal 2011, despite plunging profits in the latest quarter.
“If the last quarter results are anything to go by, then it looks like (the) top players will be a drag on the industry’s growth,” said Diptarup Chakraborti, principal analyst with technology research firm Gartner Inc.
“Given the degree of exposure top players had to recession-hit companies in the US, it was inevitable. However, if recovery starts in second half of FY10, then leading players could spring back as quickly as well.”
According to the Goldman Sachs analysts, a recovery in the second half of 2009-10 is unlikely because of the “relatively weak spending environment, which remains exposed to the macro backdrop, corporate profitability, political backlash (H1-B and L-1 work visa Bill in the US Congress), and now flu pandemics (which can drive longer sales cycles)”.
Chakraborti, however, said while customers in the US and Europe have cut spending on IT, the local market for software and IT services is growing. The firm sees this market growing 20% to $13.2 billion (Rs64,944 crore) by 2012.
“Things could look different if firms such as Wipro and TCS are successful in winning more deals in India. (But) they may have to forget about the bottom line for a while as the margins are lower in India,” he said.
On 11 May, Mint reported how Indian IT companies are raising their share of the local software and IT services market as overseas clients pare budgets.
Graphic by Ahmed Raza Khan / Mint