Accenture chairman & chief executive officer William Green has set the tone for Indian IT majors during the company?s quarterly results last month. He announced a revised business outlook to ?reflect changing foreign currency assumptions? and made ?modest and prudent adjustments to revenue outlook given overall market uncertainty.?
The case of Indian frontline companies can?t be any different. Prominent brokers? predictions seem to be an echo of Green?s comments?revenue guidance will be missed in dollar terms on account of sharp cross-currency movements and muted volume growth.
With slowdown expected to last another 12 to 15 months, Indian IT firms could be halfway through the bumpy ride in the economic turmoil. As the wait for 2009 tech budgets is expected to get longer, announcements from tech majors next week are likely to talk of lengthening sales cycles, delays in project ramps, consolidation of vendors and the loss of pricing power.
Predictably, quarterly numbers will be on every analyst?s watchlist to get clues on what to expect in the new year. Here are the top six things to watch out for:
1. Cross currency headwinds
By now, every prominent brokerage has predicted that tech majors will miss their dollar revenue guidance and have blamed sharp cross-currency movements in a big way.
Rupee?s movement against the US greenback has been under the scanner for several quarters now. But last quarter saw movement of other currencies dragging earnings. Non-rupee currencies ?are becoming much more volatile and that could impact our revenue and profit,? Infosys CFO V Balakrishnan acknowledged in the second quarter conference call. Last quarter, US dollar appreciated by 17%, 24% and 12% against British pound, Australian dollar and Euro respectively.
Cross currency movement is also expected to impact the guidance for the fourth quarter. ?We believe that US dollar guidance for FY09/Q409 could be adjusted down by about 1-2% to account for these currency effects,? says a research note from JP Morgan. Another brokerage CLSA expects Infosys to miss the lower end of its revenue forecast in dollar terms and at least the upper end of its constant currency guidance.
While 11% depreciation of the rupee could help Infosys, TCS is likely to take a hit. Also, check for cross currency hedges this quarter.
2. Non-billable days
December quarter is typically weaker because of lower number of billing days on account of Thanksgiving Day and Christmas holidays. Deteriorating macro environment has added to the weak seasonality factor and clients are forcing shutdowns. They want a non-billing period for last ten days of December and some companies have advised employees working for those clients to take leave for five business days in December, according to brokerages in touch with frontline IT companies. Number of non-billable days last quarter will surely be on analysts? radars.
3. Credit terms
IT majors are yet to acknowledge it, but analysts have confirmed demand for credit to grease sales through a tough economy. Some are looking for an increase in receivable days among offshore tech vendors as clients continue to demand more favourable credit terms similar to the 2001-03 tech slowdown period. Others are talking of creative solutions like finance investments or deferred payments. IBM, which has its own financing arm, also confirms that there has been an increase in the number of customers looking for credit. Clearly tech buyers need help with financing and IBM, Oracle and Cisco are extending credit to customers to fill the void. IBM for instance has launched a new programme last month that offers loans at low market rates with no payment or interest due for 90 days.
4. Pricing pressure
While IT majors have been candid in talking about lower IT spends and hence shrinking volumes, most like Infosys CEO Kris Gopalakrishnan and TCS COO N Chandraseka-ran categorically denied any price renegotiation during their second quarter results conference call. As tech buyers look for the best value from every dollar spent, requests for renegotiations are believed to have flowed in last quarter. Analysts like IIFL acknowledge significant price cut requests and abrupt project cancellations have marred the quarter ending December and outlook for quarters ahead. In some cases, IT vendors seem to have negotiated shifting of work offshore instead of a cancellation, it could mean lower pricing though margins may improve in the long term.
5. Hiring targets/deferrals
Hiring by outsourcers, who recruit by thousands every year, will be lower in the short term.
Infosys has already talked of freezing recruitment after meeting this fiscal year?s target and TCS has also talked of honouring all employment offer made to college graduates. None of them is likely to talk of future hiring right now, but, analysts will look for clues on hiring deferrals.
6. Volume slowdown
Nasscom?s officials have already acknowledged that second half of this fiscal will be slower than the first six months and Infosys Technologies CEO has also indicated that they expect sector growth to slump to nearly half to 15%. Tech budgets, that are typically frozen by December, are nowhere close to being crystallised and the sector faces four to six quarters of uncertainty.
Any pointers on demand pickup; pricing negotiation with existing and new clients; results of vendor consolidation exercises at large clients and cost containment measures adopted by companies will be sliced and diced in details. Analysts will hang on to every word giving clues to clients? future plans, even though clarity on momentum would not be apparent before the first quarter of 2009-10. The sentiment is perhaps summed up best by software giant SAP co-founder Hasso Plattner, ?We?re all in a complete fog. We have no idea anymore how things are going to turn out.?