Outsourcing companies’ Q2 to remain weak on US concerns

Outsourcing companies’ Q2 to remain weak on US concerns
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First Published: Wed, Jul 23 2008. 10 59 PM IST

Updated: Wed, Jul 23 2008. 10 59 PM IST
Bangalore: The impact of the slowdown in the US, the largest single market for technology spending, was clear in the April-June quarter earnings of the Indian information technology services firms, and suggests this year’s growth could be slower than expected.
(JUNE QUARTER EARNINGS) Although the results were broadly in line with the street expectations, aided by a weaker currency during the quarter, the forecast by companies such as Wipro Ltd and Satyam Computer Services Ltd for the July-September quarter—traditionally a strong quarter—was muted, reflecting cautiousness.
“The impact of the slowdown will be there all through 2008, considering it’s an election year in the US,” said Avinash Vashistha, chief executive of Tholons Inc, an offshore advisory firm.
Customers in the US, weathering a slowdown that began with a mortgages-related financial crisis, have either delayed or postponed their investment decisions on deploying new technology and applications, which, in turn, has created an uncertain environment for the Indian vendors.
Meanwhile, contrary to expectations, a quarterly audit of outsourcing contracts done by technology advisory firm TPI Inc, said firms in the US and Europe, in responding to a slowing economy, are increasing business in existing contracts and signing new deals.
In the June quarter, 146 contracts were awarded in the global outsourcing industry, valued at $25.6 billion in total contract value, or TCV, and almost $5 billion in annualized contract value, or ACV, or the value of a contract divided by its duration.
“This was the strongest second quarter performance since 2000,” TPI said in a statement.
But, Siddharth Pai, managing director of TPI’s India operations, said the bulk of the contracts being handed out by customers relate to non-discretionary work such as maintenance of applications, an area where Indian vendors have relatively less share.
A couple of quarters down the line, we expect an uptick in discretionary project based work, he said.
“As any offshoring contracts or significant layoffs become very visible in an election year, customers are going slow with their decisions,” Vashistha said.
The impact of such a development will be felt in 2009 as the built-up demand for offshoring remains strong,” he said.
The National Association of Software and Services Companies, or Nasscom, India’s software industry lobby, has forecast software exports to slow down by 4-25% this fiscal.
In April, vendors such as Infosys Technologies Ltd and Satyam Computer Services Ltd had forecast that growth in the current fiscal would come in mainly from the third and fourth quarters.
The June quarter results and the forecast for September suggest that things have hardly changed and are unlikely to allay any concerns about the sector.
“Though the results are in line with expectations, concerns will remain in the short term, say the next three to six months,” said Harit Shah, analyst at Angel Broking Ltd. Sales cycles continue to stay longer and pricing pressure continues. New client additions by the top tier vendors were relatively strong during the quarter, but hardly any large deals surfaced.
The $700 million British Telecom Plc-Tech Mahindra Ltd deal and the $100 million NXP Semiconductors-Tata Consultancy Services Ltd contract are among the few prominent deals signed during the quarter. Though revenue contribution from banking and financial services came down for some vendors, verticals such as manufacturing, retail and product engineering are looking up.
While the smaller and mid-sized vendors such as Tech Mahindra and MindTree Ltd continue to see growth, analysts believe that they will be more vulnerable in terms of being impacted due to the slowdown.
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First Published: Wed, Jul 23 2008. 10 59 PM IST