Bangalore: After weathering a tough 2007, India’s flagship IT companies face the spectre of the US economic slowing and squeezing profits as they start unveiling earnings this week, analysts say
Industry challenge: Nasscom president Kiran Karnik.
Software firms such as Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd were last year roiled by the rupee’s steepest appreciation against the dollar in three decades, surging wages and real estate values and the end of a tax holiday.
Now come possible cutbacks in the information technology budgets of US clients preparing to tighten their belts as a housing slump, tighter credit and high energy costs take their toll on the world’s biggest economy.
“The negative view is that US corporate budget growth will slow and we won’t see as much demand for outsourcing and offshoring as we saw last year,” said Suveer Chainani, technology analyst at Macquarie Capital Securities in Mumbai.
“Most people’s perception is drastically negative.”
Clues to the extent of the fallout may surface when Bangalore-based Infosys kicks off the corporate earnings season on Friday by announcing its fiscal third quarter results.
Investors hammered the shares of IT companies last year as the bad news kept piling up. IT stocks trailed the benchmark Sensex by more than 40% in 2007 and no relief is seen by analysts in 2008.
“The rising risk of an IT spending slowdown raises the hurdles on a 12-month view and we remain underweight on Indian tech,” investment house CLSA said in a report.
“Barring periodic deviations, we see absolute long-term annual stock returns of 10-12%, down from the heady 30-40% of the past,” CLSA analysts Bhavtosh Vajpayee and Nimish Joshi said in the report.
Sentiment remains negative although IT firms have remained profitable. TCS, India’s biggest software services exporter, reported a second quarter net profit jump of nearly 23% to Rs1,251 crore.
Infosys saw its profit in the quarter ended 30 September rise 18.4% to Rs1,100 crore Wipro’s profit climbed 18% to Rs8,23.7 crore.
The US is the biggest market for Indian software and service exports which jumped 33% to $31.4 billion in the year ended March and are forecast by the industry grouping National Association of Software and Services Companies (Nasscom) to reach $60 billion by 2010.
The industry has been at the forefront of India’s strong economic growth, benefiting from work farmed out by cost-cutting global companies to take advantage of India’s vast engineering talent pool and low labour costs.
But last year took the sheen off the sector as it reeled from a 12% rise in the value of the rupee against the dollar, an 18% jump in wages and increasing rental costs and real-estate valuations.
The government also last year extended a 13.3% tax to export earnings. The tax previously only applied to local profits.
The rupee’s rise caused the biggest hit, reducing the local equivalent of every dollar earned by an industry whose expenses are almost all incurred in rupees.
“The rupee is the biggest issue because currency movements are not in the hands of the industry,” said Tejas Doshi, analyst at Sushil Finance.
According to Hiten Shah, an analyst at Angel Broking, every percentage point rise in the rupee shaves 30 to 50 basis points off the profit margin of Indian IT companies.
In October, Infosys predicted the currency’s gain would wipe Rs2000 crore off revenue and Rs250 crore off profit in the financial year ending 31 March.
Higher fees and business expansion as clientele grew helped make up for the currency losses, but slowing economic growth may force US corporations to curtail spending and investment, including IT outsourcing budgets. “There will be some ups and downs,” said Kiran Karnik, who heads industry body Nasscom. “But I get a sense the US has overcome the worst of its problems and will get back on track soon.”
“And the exchange rate will be reasonably steady—we’re not going to see the 12% rise we saw (last year) in the rupee,” said Karnik.
In the long run, Indian IT firms could benefit from a US downturn as clients farm out more computer services work to low-cost locations, said Chainani at Macquarie Capital. “When you’re in troubled times, you fly budget carriers instead of business class in a top airline,” he said. “Instead of building in-house IT capabilities and local sub-contracting, they’ll look more at offshoring and outsourcing to India.”