Indian IT firms brace for US slowdown

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: IT demand may be tighter than previous years and could create a rough patch for stocks near-term, we share the consensus view that the offshore demand will increase in response to a slower environment and drive-acceleration in the second half,” the report said.

In 2001-03, during the post-tech boom and the dotcom crash, the Indian IT industry had gone into a sluggish phase following lower demand from the US corporates and had to cut rates leading to impact on margins and lower profitability.

But, this time around, the players are better prepared for the slowdown. “Most companies have employed more variable compensation, while there is still flexibility in general and administration (expenses), utilisation, headcount and increasing productivity. Helping matters is the more rational pricing versus the last slowdown,” the report said.

There are four main inter-linked factors that have had a direct impact on the Indian IT industry’s competitiveness— the rupee appreciation, the tight labour supply and wage inflation, and macro issues. Compounding these is the vanishing tax holidays for IT firms in March 2009. The rupee appreciation against the greenback—nearly 10% in 2007—has adversely affected the margins of the Indian IT players that have taken a hit of 0.4% to 0.5% and have been unable to pass on the impact to their clients because of the deteriorating macro-economic situation. Although most companies have hedged the rupee against the weakening dollar, in the long-run, unfavourable currency appreciation may put pressure on earnings.

The supply of labour and wage inflation are directly co-related. With demand surpassing supply, wages have been rising 15% annually. Apex software companies’ body Nasscom estimates an annual supply of 200,000 engineers, 24,000 MCAs, 30,000 post-graduates and 350,000 graduates. Currently, there are 1.6 million technical professionals employed in the IT industry and Nasscom estimates that the number will grow 25% this year to touch two million. But the lack of quality talent is quite alarming. Only 15% of the non-engineering graduates and 50% of the engineering graduates are employable. This has forced companies to open their purse strings to get the best of the lot.