2013:ITs looking down the barrel

Written by Darlington Jose Hector | Updated: Dec 17 2012, 16:51pm hrs
Any hopes of a better and brighter 2013 seems to be fast evaporating. Management commentary from leading and even mid-tier software firms have not been encouraging, pointing towards a very muted phase of growth in the IT sector next year.

The cascading effect was set off by Cognizant, the US headquartered IT major with a substantial Indian presence. In a SEC filing the Nasdaq-listed firm said it will pay top executives a 100% performance linked stock options if its revenues touched the $8.51 billion mark in 2013. However, a back-of-the-envelope calculation revealed that this would result in a growth of only 16%, much below its expected growth of 20% this year.

This was indeed surprising because Cognizant was one company that was zooming off on a fast lane, leaving most Indian IT firms behind. The news of Cognizant taking a conservative stance surprised the industry and a few alarm bells rang.

This was soon followed by statements from the Infosys top management about the need to drive down estimated revenue projections. During discussions with analysts recently, Infosys said the company may miss its organic growth guidance of 5% for the current year because of delays in decision-making by certain key customers and ramp-downs in certain projects. Then it also mentioned something uniquethe impact of Hurricane Sandy.

Barclays has projected a 3.8% revenue growth for Infosys this fiscal and thats bad news for investors. The guidance however does not take into account, revenues generated out of Lodestone, the Swiss firm that Infosys acquired in September.

Infosys had initially guided for a 8-10% revenue rise for FY13. But after the first quarter results, it lowered it to 5%. The call was then taken to abolish the practice of giving out quarterly forecasts. But just when one thought that was the end of it, in came another surprise in the way of the investor call while forecast further doom. A note from UBS said Infosys management remarked that the guidance was under threat due to delayed customer decisions and that the crisis was especially deep in the manufacturing sector. Now, only Infosys can probably explain why the crisis is so acute at the Bangalore company. While the management has tried to throw more light on the issue in many ways, the fact that it had to drive the guidance downwards twice in the same year does not augur well.

The wave has percolated down to the mid-sized IT firms too. Mumbai-based Hexaware has stated that it will take a $4 million hit in the present quarter, after one of its top customers changed its business plans. This has resulted in the company slashing its full year revenue growth forecast by 2% to touch 18%.

Nasscom had initially projected a 11-14% revenue growth for the Indian IT sector this financial year, but it has now lowered it down to 11%. I am sure Nasscom chief Som Mittal will be pleased to see at least a double-digit growth this fiscal for the industry, after being witness to all these dramatic developments.

The BFSI segment, softwares most crucial vertical, continues to be under duress. This has contributed immensely to the slow pace of recovery. Europe continues to be a thorn for Indian IT, and very little progress has been made there. The European economy continues to look down the barrel and that has harmed Indias software revenues in a big way. The emerging markets too have been of little help.

The way it is going, there is unlikely to be much let up in the way things will move next year too. Indian IT vendors will have to dig deep into their reserves to come up with solutions. Controlling costs can only yield some limited relief. Thats not a solution in itself. Its clear Indians IT players have to start deriving more value out of their software product initiatives.

TCS CEO N Chandrasekaran is the only one who has come up with some positive noises. He said US is recovering after its Presidential elections and that it would do better in the tech sector soon. More than anything else, a recovery in the US is what will have the most telling effect on Indias IT sector. Hope Barack Obama can put his house in order, faster, this time around.