The Indian IT industry, in general, is entering a difficult phase and companies from this space are not expected to show any positive surprises for the December quarter. With demand for export services in the top markets of the US and Europe remaining weak, IT companies have many challenges to face in the next 1-2 years.
Companies across the sector are facing uncertain times as it is feared that several US-based financial services companies have cut down their discretionary IT expenditure pertaining to software applications and new IT projects.
IT budgets are usually the first to be slashed in downturns. Cost cutting is likely to be severe due to the crisis that hit the banking sector. While over two-thirds of IT exports are in dollar terms, more than one-third comes from Banking, Financial Services and Insurance (BFSI) clients.
Given the wild fluctuations in the rupee vis-à-vis dollar and problems in the BFSI space, the situation remains challenging for outsourcing companies. Though the impact is likely to be muted, the woes of auto companies in the US are also likely to affect margins in the next 1-2 quarters.
Of late, IT firms are also coming under pressure to reduce their number of onsite work force as customers such as Royal Bank of Scotland, GE and Bank of America are tightening their information technology budgets and are questioning the traditional model of billing customers based on time and material invested in projects, especially for work where fewer professionals could be billed.
As a result, traditional onsite roles such as liaison manager, requirement analysis professionals and tech employees involved with development of technical specifications with a customer are reportedly being brought offshore. The offshore movement of more work and roles is expected to dent tech companies' profits.
Moreover, the Indian outsourcing firms are also under pressure to consolidate dedicated offshore delivery centers.
Notwithstanding the impact of the global economic turmoil, the Indian IT industry is optimistic about the long-term growth prospects, as it has benefited from the downturns in the past. Once the dust settles down, it is believed that India's IT companies will be part of the solution to the crisis, rather than being part of the problem.
A section of analysts argue that cost cutting could conceivably lead to outsourcing of more work to the cheaper offshore centres such as India. But it may take time as a recovery is expected only in late 2009 or early 2010.
The small and medium-sized companies in the US, and manufacturing and utility companies, who are yet to take advantage of off-shoring and outsourcing, present a huge opportunity for the Indian IT SMEs.
The industry is pinning hopes of an improvement in the American market by September and more outsourcing business from countries like Sweden, Germany, Japan and Australia.
A high degree of vendor consolidation in search of value and more pro-active measures by the US President-elect, Barack Obama, once he assumes office, may also help the industry.
"Contrary to general perception that slowdown and mergers will bring down outsourcing component, I believe that this will create a new wave of outsourcing with more business coming in," said management guru Dr C K Prahalad at the Indian School of Business earlier in December.
On the other hand, India's IT majors are looking beyond the immediate crisis plaguing the global economy. The likes of HCL, TCS, and Wipro have used their cash reserves to acquire companies of strategic interest (Axon, Citigroup Global Services and Citos), as they clearly see the slowdown as an opportunity.
Analysts expect the major IT firms such as Infosys, TCS and Wipro to report lower numbers for the December quarter. These companies may miss their guidance for the quarter and reduce the target for the rest of the year, as clients in the developed countries delay or cancel contracts due to the economic crisis. Infosys will report its scorecard on January 13th, followed by TCS on 15th, Wipro on 21st and HCL Technologies on 23rd.
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