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Can the IT sector weather the global storm?

Monday, September 26, 2011

There used to be a saying in the India of the 1960s, that when the US sneezed it was India that first caught a cold. The same principal is again showing applicability for the Indian IT sector, which is presently under pressure in the wake of the fiscal crisis of the US. However, in a ray of sunshine, analysts feel that the US dollar will stay strong – a move that would help the IT sector. Manik K. Malakar reports…

“The near-term prospects of the IT industry are quite uncertain as the biggest clients of the industry are in the US or in the Euro region and the economies of both these are passing through turmoil,” says D. K. Aggarwal, CMD, SMC Investments and Advisors.

The generally downbeat economic situation in the US is yet to continue. The actions towards solutions are so meagre and time consuming. In this context of global scenario, we have to evaluate the prospects of the Indian IT industry,” says K Jayraman, Research Associate, Bonanza Portfolio.

So just how deep will the hurt for IT companies be and how long will it last?  “By and large up till now, according to analysts, there have been no serious repercussions that would affect the IT industry in terms of budgets, downsizing etc. “Top end companies are continuing to do well but there are concerns and apprehensions as we go forward due to the persistent and prolonged global financial crisis,” said Jayraman.

As an addendum the spreading fiscal contagion has now reached Italy which has been downgraded by S&P, as the US was a few weeks ago.  But analysts note that India’s IT companies at least the large ones will have bargaining power…for now!

‘The bargaining power of Indian IT companies on fresh business could go down with marginal downward bias in the projected growth rate, but Indian IT companies will scrape through the financial year 2012,” said Jayraman. “The pain should only be in the short to medium term, especially for the big players,” said Aggarwal about the timeline for IT woes.

However, other analysts are less sanguine about the prospects for the smaller IT companies. Brokerage Emkay analysed the prospects for some of the smaller IT companies. They had earlier cut estimates for Tier 1 IT companies in the wake of the worsening macro scenario. ‘We see September,11 and December,11 quarters to be largely in line with prospects of project delays, cancellations reflecting from the March,12 quarter onwards only,” said Emkay in their IT note.

So as their estimates for the larger IT companies are being trimmed down, so too the prospects for the Tier 2 companies which are already facing pressure. We cut our FY13E (Financial Year 2013 Estimates) revenue for mid tier companies by 2 to 5% and now build in a 9 to 23% dollar revenue growth (as compared to 14 to 29% earlier) driving approximately 3 to 11% cut in earnings estimates leading to a 6 to 18% cut in our target prices,” noted Emkay of the Tier 2 IT companies.
The companies that Emkay had covered included NIIT Tech, Infinite, Patni Computers, Hexaware, eClerx, Tech Mahindra, Mahindra Satyam and Persistent. Of these, Emkay has put ‘Accumulate’ recommendations on Hexaware (Target Price Rs. 80) and NIIT Tech (Target Price Rs. 235). Emkay however notes that possible positives for their Tier 2 IT company coverage would include a better than expected volume or revenue growth as also a depreciation in the dollar to rupee exchange rate.

So going forward for the IT sector is how the US and the European economies shape up. Tough fiscal times in these regions may mean that clients from these regions may reduce discretionary spending. “If any of the client companies file for bankruptcy, then the revenues and the profits of some of the companies could be adversely affected,” said Aggarwal.

SMC’s Aggarwal also noted that 2012 is an election year in the US and thus many companies may reduce their contract sizes which would be coming up for renewal.

Jayraman notes that there many positives for the IT sector. “The addition of employees by IT companies even up to recently are at good levels and may continue as well,” he said. Even the IT industry in the US has not been much affected to date and would post a growth of 7 to 8% for the current year. The global scenario may affect the fresh accrual of business at good profitability’s, existing business more or less is continuing to do well. “The Indian IT industry may have some slackness in growth during the next two quarters but there is no cause of serious concern as of now,” Bonanza’s Jayraman concluded.

Top end companies are continuing to do well but there are concerns and apprehensions as we go forward due to the persistent and prolonged global financial crisis

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