Dec quarter may be worst in 10 yrs for IT

Dec quarter may be worst in 10 yrs for IT

Bangalore: It may be the festive season for some, but analysts say the three months ending 31 December will be the worst quarter in almost 10 years for Indian software services firms such as Tata Consultancy Services Ltd, or TCS, Wipro Ltd and Infosys Technologies Ltd as customers in the US offshore less business, and bargain for lower prices.

The IT firms could see their lowest sequential (this quarter over the last) growth in volume, add the analysts. Most Indian software services firms, with the exception of TCS, opt for so-called time and money contracts where they bill customers by man-hours spent on a project. Their growth in revenue is a function of man-hours (or volume) and billing rates.

The US is the world’s largest technology market and accounted for between 50% and 60% of the revenues of the three Indian firms in the three months ended September. Since September, however, the economic situation in the US and the rest of the world has worsened. India’s software lobby group, the National Association of Software and Service Companies, or Nasscom, had estimated that India’s software and back-office services industry would grow by 21-24% in the 12 months to March, but its president Som Mittal said on 15 December that this number could be revised downward. India’s software and back-office services exports reached $40.4 billion (about Rs1.96 trillion) in the year to March.

Several Indian companies had expected business to grow in the second half of the year to March, starting October.

“Their (customer’s) feedback suggests that their IT spend would be back-ended (i.e. higher in the second half of the year). Our guidance is based on data we have collected from them," V. Balakrishnan, chief financial officer, Infosys, had previously said.

Since September, several US investment banks have collapsed, and the world’s biggest economy had tipped into a recession. India, which grew its economy by an average of 8.9% in the past four years, could grow much slower this year.

“(For the) first time in 10 years, we could see volumes declining sequentially this quarter," said Mitali Ghosh, a research analyst with Merrill Lynch and Co., Inc., in a research note on 11 December. “Compounded by weakening of the European currencies, we forecast a quarter on quarter decline in dollar revenue for all majors".

The three months to December also coincides with the holiday season both in India and US, and is traditionally a weak quarter for Indian software firms as they have fewer people deployed on projects.

“The utilization (of people) would be low; it is negative. Volume growth would be lower," said Dipesh Mehta, an equity analyst tracking the IT sector at Khandwala Securities Ltd, a Mumbai brokerage. “The rupee would be the only saviour (for the software firms)". The Indian currency has depreciated around 5% against the dollar, the currency in which most software firms bill customers, since 1 October.

Viju George, equity analyst with Edelweiss Capital Ltd, another Mumbai brokerage, expects Indian firms to register low single digit volume growth.

TPI Inc., an offshore advisory firms that helps companies chose offshore partners and locations, said that since September, the volume of project based services and staff augmented services for Indian software firms has reduced significantly.

“We have found that the bottom has not (been) reached. It is going further down," said Siddharth Pai, partner and managing director at the Bangalore office of TPI. “There is delay in decision making; they (customers) are not sure (whether this is) the bottom of the trough".

In a 9 December report, research firm Forrester Research Inc. projected that IT outsourcing growth would remain moderate till 2010, even as recession in the US continues till mid-2009. The moderate growth would be due to smaller outsourcing deals and the 9-15-month time lag between decisions to outsource and the actual transition, the firm said.

Merrill Lynch’s Ghosh said in her note that instances of companies wishing to renegotiate rates had grown in the past three months and that this, and the risk of companies opting to work with fewer service providers had combined to push billing rates to under $20 an hour in some cases.