Software exporters face gloomy outlook as slowdown lingers

New Delhi: A slowdown in decision-making and cutbacks in discretionary spending, especially in the banking and financial sector, will continue to impede the growth of the $70 billion software services export sector in the coming quarters.

According to reports of several brokerage firms, which attended analyst meets organized by the country’s top information technology (IT) firms Tata Consultancy Services Ltd (TCS) and Wipro Ltd, the near-term outlook for the sector continues to be gloomy even as it shows promise in the long term.

Ashish Chopra of Motilal Oswal wrote in his 13 June report that the BFSI (banking financial services and insurance) vertical remains under stress, having witnessed spending cuts in a few segments.

“Decision-making in discretionary spends remains very slow, and there are few indicators of improvement in the same.” He added that negative publicity around visa issues and election year in the US have compounded concerns.

While a favourable rupee, which has fallen by almost 10% in the last three months, could help offset some of the negative impact of wage increases and visa fees for companies such as TCS, it could also mean pressure on pricing as clients may demand some benefit of rupee depreciation through rate cuts.

“We believe that if the rupee remains weak at Rs.54-55 to a dollar levels for a period of time, it could trigger more than just sporadic discussions around pricing,” Chopra said.

While TCS has announced a wage hike of an average 8% for its offshore employees and 2% for those onsite, Infosys is waiting for more clarity on business demand, while Wipro is expected to raise pay effective June.

While analysts are enthused about Wipro’s strategy to focus on key verticals such as BFSI, healthcare, retail and energy and utilities, which constitute almost 65% of its revenue, apart from driving more sales from key 138 clients, they are cautious on growth and the long wait for an overhaul at the company.

Shashi Bhushan and Pratik Shah of Prabhudas Lilladher wrote in their report that according Azim Premji, Wipro’s chairman, the IT industry would deliver growth of 13% for the current financial year. “However for Wipro, the sales cycle is now slower than what they witnessed in April (earlier the management indicated acceleration in decision-making in April’12 after a slow start for calendar year 2012). The growth is likely to be anaemic for Q2FY13.” The report added that the company didn’t indicate any improvement in the demand environment. “There is pricing pressure in some verticals. The deal closure continues to remain a moving target since January.”

Ankita Somani of Angel Broking was more upbeat on the company as it has operating margin levers such as improving utilization level (which has been the lowest since FY2008) and increasing offshore revenue. “Early signs of restructuring yielding results are visible in terms of improvement in the deal pipeline, growth seen in the company’s focus industry verticals and increasing revenue from the company’s top clients.”

On the other hand, TCS has indicated that its volume growth in the current quarter would be more than the 3.2% registered during the March quarter this year. In a different report, analysts of Prabhudas Lilladher wrote that even though the cautious stance taken by clients of TCS in February 2012 still continues, “according to the company, the ramp-up of new deal wins and status-quo in the environment would help them to deliver growth better than quarter four of last fiscal.”

In line with its smaller rivals, TCS is also witnessing softness of demand for IT in the banking and financial sector and from the UK. However, it is expecting to grow from deals in insurance, telecom and from continental Europe.

However, near-term challenges persist for Infosys, which is seeing almost 40% of its business under stress, according to Chopra of Motilal Oswal. “While it is growing geographies like France and Germany, and services like cloud and mobility at a very high pace, given their low base, this does not translate into overall growth for the company.”

He added Infosys is expecting good growth from verticals such as telecom, healthcare and retail. However, even for Infosys, BFSI continues to be a laggard.

“The industry has thrived on low hanging fruits (BFSI and North America) thus far. Focus will (now) shift to under-penetrated segments which still have a lot of growth to offer,” summed up Chopra of Motilal Oswal.

surabhi.a@livemint.com