Active Stocks
Tue Sep 26 2023 15:58:49
  1. Tata Steel share price
  2. 128.85 1.18%
  1. Tata Motors share price
  2. 619.75 0.19%
  1. HDFC Bank share price
  2. 1,537.65 0.39%
  1. State Bank Of India share price
  2. 594.3 0.03%
  1. ITC share price
  2. 442.4 -0.05%
Business News/ Industry / Infotech/  Amex stops giving fresh work to Indian IT firms

Bangalore: American Express Co. (Amex), which outsources projects worth nearly $1 billion (around 5,500 crore) a year to India, has stopped giving fresh work to its software vendors in the country, depriving them of millions of dollars in revenue in the December quarter.

The US credit card firm halted projects from 21 November, asking Tata Consultancy Services Ltd (TCS), Infosys Ltd, Cognizant Technology Solutions Corp. and Syntel Inc. to wait till 31 December for clarity, said executives at the software exporters. The firms have so far lost six weeks of billed work.

“We are hoping to hear something concrete on budgets and new projects for this year in a week or two," one of the executives said.

These executives requested anonymity because they were bound by non-disclosure agreements signed with American Express.

Amex’s decision hints at a larger symptom of banks and financial services companies spending lower on information technology (IT), which will likely hurt revenue prospects for India’s $70 billion software exports sector, say analysts.

Traditionally, banks and financial services companies like Amex, Citigroup Inc. and JP Morgan Chase and Co. have been large spenders on IT, accounting for more than a quarter of the revenues of India’s top technology firms.

While TCS, India’s biggest software exporter, earns around $220 million a year from Amex, Infosys delivers projects worth $200 million for the credit card firm, according to the executives mentioned above.

Cognizant, the US-headquartered firm with most of its staff in India, gets around $100 million from American Express a year.

In December, Syntel, a mid-sized software outsourcing firm that gets more than half of its revenue from financial-services customers including Amex and State Street Corp., the third biggest custody bank in the US, lowered its revenue forecast for 2012 by around $10 million citing reduced spending from one of its customers.

“It’s kind of what peers have been talking about. Projects are taking longer to ramp up, the sales cycles have increased," said Zaineb Bokhari, head of investor relations at Syntel.

“We had noted some hesitancy from our customers in third quarter, though it has not worsened since then," she added in a phone interview, without naming the customers.

Spokespersons at American Express had not responded to an email query sent on Monday till press time.

An Infosys spokeswoman said her company will not comment on specific clients. A TCS spokeswoman said her company is in a silent period ahead of December quarter earnings announcement on 14 January.

It all started when several US banks, including Amex, Citigroup and JP Morgan Chase, shut operations in lower Manhattan because of hurricane Sandy in October. These banks closed down support, application development and maintenance work for a portion of their processes because of revenue losses, said the second executive mentioned earlier.

“This can also be described as lag effect of the Sandy. The storm may have passed on but there’s clarity needed on new projects," he said.

According to outsourcing advisory firm Everest Group, banks are likely to increase their software outsourcing budgets by just about 5% in 2013, much lower than the 10-15% growth seen until 2-3 years ago.

“Until now, these vendors used internal efficiency to retain profit. The challenge going forward will be to sustain that because you cannot have staff utilization rates of 95%" as banks and financial services firms spend less on IT, said H. Karthik, a research director at Everest Group.

Infosys, India’s second biggest software exporter, will announce its quarterly financial results this Friday, launching the earnings season for the sector. Already, analysts expect India’s top technology firms to grow their December quarter revenue by a modest 2-3%.

“We understand that, apart from seasonality, delays in decision-making have continued and also, the actual amount of spends as compared to budgets are relatively lower," Dipen Shah of brokerage Kotak Securities Ltd said in a 4 January report. “Hurricane Sandy has probably resulted in shutdowns by some companies, further impacting revenue growth in 3Q (third quarter)."

Some analysts said the shutting of outsourcing projects by some financial services customers will affect near-term demand and growth for IT companies.

“We believe that the up-coming result season is unlikely to be a positive catalyst for sector fundamentals. Uncertainty over 2013 budgeting and significant pricing pressures remain the key themes in the sector for now," brokerage CLSA’s Nimish Joshi said in a 3 January report.

Banks, though, continue to spend on back office work, according to Everest Group. “The BPO (business process outsourcing) story looks rosier, which will continue to grow in double-digit even during 2013," said vice-president Rajesh Ranjan.

"Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!" Click here!

Catch all the Industry News, Banking News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Updated: 08 Jan 2013, 12:00 AM IST
Next Story
Recommended For You
Switch to the Mint app for fast and personalized news - Get App