Why Nasscom should retire its forecasts permanently
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Nasscom has deferred the release of its annual revenue forecast for the financial year 2017-18 by a quarter.
The software services industry lobby group spoke of uncertainties in the short-term, and the need to have deeper interactions with customers and vendors before making a reliable projection for FY18.
In any case, Nasscom’s practice of providing a growth forecast in the first half of February was strange. According to an analyst at a domestic institutional brokerage, this is much before companies complete their budgets for the coming year, making Nasscom’s growth target more of a guesstimate. A company executive at a top-tier IT company concurs, adding that the methodology used to come up with the forecasts is unscientific. In this backdrop, it seems best that the annual forecasts in February are stopped.
In particular, there are question marks on how export revenues of captive outsourcing firms and multinational firms are captured. As such, the growth targets and industry revenue size as claimed by the industry body are taken with a pinch of salt by the analysts’ community. In the past, when the industry lobbied to get tax breaks from the Indian government, it perhaps made sense to highlight the size of the industry. But now, a moot question is: ‘What purpose does the Nasscom forecast serve?’
Each year, around the same time, Cognizant Technology Solutions Corp. provides annual guidance, which provides some clues about the industry’s performance in the coming year. In 2017, Cognizant expects revenue to grow between 8% and 10%. This is more or less in line with the 8.6% growth it reported in 2016.
According to the above-mentioned analyst, this is heartening in light of the uncertainties in the US lately. Cognizant has a large exposure to the healthcare vertical, and a change in policy by the new US President may result in deferment of IT spending by companies in this sector. For the company to still guide for as much growth as last year, and that too on a higher base, is therefore seen as a positive sign.
Analysts at Kotak Institutional Equities wrote in a note to clients: “There are initial indications of higher spending in the financial services vertical; announcements of integrated digital deals, albeit sporadic; and no acceleration in the intensity of shift to captive centres, as witnessed at the beginning of 2016. These factors indicate that 2017 holds promise for Indian IT.”
Emkay Global Financial Services Ltd’s analysts say that certain cyclical headwinds which dragged growth last year, such as pressure on US corporate earnings and Brexit related uncertainty, will abate in the next few quarters, and provide some relief to the offshore IT Services space.
Of course, it’s true that Donald Trump can play spoilsport for the sector, and both companies and investors are forced to live with increased uncertainty. Prima facie, it seems that the deferment of Nasscom’s guidance gives credence to this view. But, in fact, its guidance or the lack of it makes us none the wiser.