Delayed By Fog

Written by Rajesh Menon | Updated: Jan 28 2008, 06:20am hrs
It was supposed to be a quarter with no surprises and the managements of the Indian IT companies performed to that script. But the usually staid quarter was on the watch list of the analysts, investors and broking community for a different reason.

They all wanted a peep into the future, a look ahead that will give them some visibility in the foggy scenario whether the US economy was heading for a slowdown. The sub prime crisis made large banks and global financial institutions write off billions of dollars and the IT budgets of these mega corporates that would determine the Indian software exporters growth path. And here is where the script went slightly awry. For the Indian companies, as is their wont, stuck to a steady line: cautious optimism.

Peppered with talks of strong pipeline, stable pricing environment and offshoring becoming mainstream, they refused to bite the bullet and come out with a clear picture on the days ahead. Some of them beat the street expectations, while others fell below it; most of them increased their guidance marginally upwards and continued to guide flat margin outlook; but the one common thread running along all of them was to wait and watch. We see several opportunities for growth in the marketplace and have concluded nine multi-year, multi-million deals during the quarter. We saw pricing environment to be positive and rate increases continuing. There has been a delay in the finalisation of IT budgets and we will get a visibility in end January or early February, says Infosys chief executive officer S Gopalakrishnan. He set the tone for days to come as the IT bellwether was first out of the block with its third quarter earnings. Infosys posted 25.1% rise in net profit on 16.9% growth in revenues for the third quarter ended December 31, 2007.

We are cautiously confident that our geographical footprint, full service offerings and innovative customer engagement models will help us stay on a growth trajectory, remarks Indias largest software exporter Tata Consultancy Services chief executive officer S Ramadorai, as his company posted 19% growth in net profit on 22% revenue increase year-on-year.

If for the past several quarters the focus was entirely on the appreciating rupee against the US greenback, this time around, the queries revolved entirely on the IT budgets and the banking, financial services and insurance (BFSI) sector. With reports indicating that the large banks and global financial institutions would be going in for a cut in their IT budgets over credit woes, Indias IT majors were at pains to explain that they had not encountered any project cancellations or felt the impact of the credit meltdown in the US on their BFSI business. On an average, the BFSI segment constituted almost 32% of the revenues of the top five IT companies in Q3 and the US market accounted for close to 60% of the topline.

Financial services business grew nearly double digit (9.8%) sequentially during the quarter, despite this being challenging times for the sector. We continue to win large deals and have a healthy pipeline of these deals as we move into a new calendar year, says Wipro chairman Azim Premji, a week after its neighbour and competitor Infosys had announced its results. TCS also had a similar story to tell: Despite external challenges, the banking and financial services vertical witnessed strong growth in Q3 with the revenue share increasing sequentially.

Even as these optimistic remarks came in, a cautious step was also taken. The only concern or maybe area where we are watching is how do the budgets for next year look like Most of the budgets should have been typically completed by now. But we are seeing some customers at least delaying it to the end of the month or early part of February when they will share it with us. So, thats the only data point that we are waiting for, says Gopalakrishnan.

On its part, Wipro says most of their clients had got their budgets in place, while a few of them had cut their IT budgets. But what most of them were doing was that they were prioritising their budgets. Projects that have 2-3-year pay offs may not be started this year. Those kinds of deferrals are possible, says Wipro.

In a report on the Indian IT services companies in mid-December, global investment bank JP Morgan had said their channel checks had shown that the IT budgets of large global banks and financial institutions were seeing a lot of pressure. Most CIOs are indicating flat-to-slightly-down budgets for 2008 with cuts in discretionary spending projects in first half of 2008. Nearly 35-45% of the revenues of IT majors come from discretionary spend.

However, the Indian IT companies continue to put up a brave front and say that with the offshore becoming mainstream, even if the budgets remained flat or slightly down, the proportion of IT spend towards outsourcing would only go up. We believe that the IT spending environment will be favourable to large offshore players like us, even though the macro environment is challenging, according to Infosys.

We are relentlessly driving for higher pricing for our services and have seen prices increase from existing customers in the range of 3-5% and our new customers are coming in at around 5% higher than our average, says Premji.

The Indian IT majors seem to be gearing up for a bumpy ride as they wait and watch for their clients to come out with the budgets. Interactions with our customers have been positive and indicative of continued growth. However, we are monitoring several market factors including the economic environment in the US, which could have a bearing on our customers spending,says Satyam chairman B Ramalinga Raju.

Gopalakrishnan is confident that even if they cut the IT spending, it would be by a couple of percentages. Even where the budgets have been closed or completed, we are seeing 6% increase in IT budgets for calendar year 2008 and offshore continuing to get a higher proportion of this growth. That trend continues. Last year, it was estimated to be 8%. So its still not too much lower than last year and that is a positive data point, he says.

In the meantime, these companies, besides increasing prices and tapping new geographies, are also going in for a mix of service lines that will enable them to weather the anticipated slowdown and cut in IT budgets. We are now focused on co-creating value through strategic partnerships, says HCL Technologies chairman Shiv Nadar.

But it is not mere strategic partnerships. All of them are pursuing large dealsbetween $50 million and $100 millionexpanding to new markets that are under-penetrated and have a much more stable currency and are eyeing inorganic growth. While Satyam acquired the Chicago-based consultancy firm Bridge Strategy Group to provide end-to-end industry, process and management consulting solutions to its clients, Wipro is accelerating investment in the Middle East, Germany and Canada and also looking at inorganic initiatives to bridge its strategic gaps. Infosys, too, has been slowly spreading its base and derisking its revenues from one region aloneNorth America.

So, as these companies continue to expand, derisk and stay cautiously optimistic, it will take a couple of weeks more for the picture to be clear. As Premji says: We are not seeing any signs of slowdown genuinely, we dont know.