Bangalore: Financials on the mend and signs that the world economy is not falling off the cliff are good news for India’s high-profile information technology (IT) outsourcing industry but that’s still not enough for the sector to regain its past glory.
Also See Key Facts On India’s Software Services Industry (Graphics)
Many customers of India’s software services exporters, who had so far chalked up impressive rates of growth, are struggling to stay afloat, have gone bankrupt, or are tackling severe cost cuts, leaving them little room to boost technology spending. Add the risk to earnings from the rupee trading at five-month highs, the end of a decade-old tax holiday next year on major technology facilities and the pressure on bailed-out clients not to outsource jobs, and the outlook becomes messier.
“The economic downturn is so severe that people are not making decisions on investments and they are cancelling new project works. It’s very tough time for these guys,” said John McCarthy, principal analyst for Forrester Research. “The golden age of massive profits for offshore companies is over.”
Powered by an army of low-cost, English-speaking workers, India’s $60 billion (around Rs2.8 trillion) IT outsourcing sector provides services ranging from managing complex computer networks and call centres to software coding to maintaining technology operations. Indian software services firms came out of the 2000-02 technology spending bust with sales growing up to 50% a year as they won over companies to contract out inefficient operations instead of managing them in-house.
But as global companies scramble to chalk out new business strategies after the recent financial crisis, caution is the buzzword, especially for longer-term contracts.
“At the macro level, there is some confidence back, people are slightly more comfortable, but on the ground, things are still the same,” Infosys Technologies Ltd’s chief financial officer V. Balakrishnan told the Reuters Global Technology Summit this week.
“Customers are still focused on cutting their spending, so the IT budgets are under pressure,” he said. “If the second half recovery happens, like what the market predicts, possibly it will be in the beginning of the next calendar year.”
Infosys last month forecast its first decline in annual revenue in dollar terms, marking a watershed for a sector that is a magnet for thousands of young job-seekers in the country.
Infosys, rivals Tata Consultancy Services Ltd (TCS) and Wipro Ltd also face competition from big firms such as International Business Machines Corp. (IBM), Accenture Ltd, Hewlett-Packard Co. who have raided their home turf and are winning contracts.
“From our financial services point of view while the full recovery has not happened, there is stability,” said TCS chief operating officer N. Chandrasekaran.
Top IT firms were unlikely to move back into peak valuation range of 20-30 times forward earnings as the days of heady growth rate are over, Religare Hichens, Harrison said.
India’s IT sector index is up 26% this year, underperforming a 42% rise in the Sensex on the Bombay Stock Exchange. Infosys and TCS have both gained about 35% and Wipro is up 60%, but analysts remain cautious as customers still struggle.
British telecom carrier BT Group Plc., one of Infosys’ top clients, cut its dividend and announced 15,000 further job losses last week. General Motors Corp. (GM), a client of TCS, may need to enter bankruptcy to restructure. Nortel Networks Corp., a client of TCS, Infosys and Wipro, filed for bankruptcy in January.
Valued at at least $18 billion, Infosys trades at 15 times forward earnings, while TCS is at about 13 times and smaller rival Wipro at about 16 times.
The rupee fell 19% in 2008 helping cushion margins of Indian exporters.
A tax holiday scheme for software firms located in technology centres expires in March, and this would hit earnings of top firms from April 2010 onwards by raising their tax rates to 18-22% from about 10-15% currently, analysts said.
Any protectionist measures, mainly in the US, to stem the flow of jobs to emerging markets are a concern after the US President Barack Obama unveiled plans to tighten rules allowing firms to defer paying taxes on profits made overseas.
Graphics by Paras Jain / Mint