Some say it’ll take time for IT to reach Slowdown Ave

Stoic software sultans are prone to stating business remains normal, no matter the visceral heave-ho in the developed world.
Point is, they may be right — if only because it takes a while for the tail to sting.

The immediate impact, some analysts said, could be limited to pressure on profit margins as large information technology firms are forced to offer services at lower price points.

Ani Chakravarty, director at consultancy, Deloitte Haskins & Sells, believes since the issues in the US are at the macro-economic level, it’ll be a while before they are transferred to the Indian IT industry.

Those who advise corporations on outsourcing strategies say US firms may prefer to tighten purse strings when it comes to spending on technology.

“Budget tightening might have some impact on the IT industry, but historically, Indian IT companies have been able to customise their solutions as per the requirement of clients, even if it means a cut in the budget,” said K G Purushothaman, director, sourcing advisory Protiviti.

“Big IT firms may have to offer services at a lower price, which can impact their margins,” said an analyst with a domestic brokerage, who did not want to be named. “Even discretionary spends like software testing will not come down as no company can risk running a software that’s not tested.”

Indian firms, however, continue to maintain this phase shall pass too, and even if it doesn’t, learnings of the 2008 crisis are good enough to sail through any coming storm.

“I feel structural weaknesses in economies offer opportunities to IT services companies, as we help global corporations ‘variablise’ their IT, making them fundamentally more adept at competing,” T K Kurien, chief executive of Bangalore-based Wipro, India’s fourth-largest software maker.

“Also, we feel that the industry is far more prepared for any change in the negative macroeconomic environment now than we were in 2008.”

A spokesperson for Noida-based HCL Technologies said the US downgrade would not have an impact on the market segment the company plays in.

HCL’s largest revenue contribution comes from remote infrastructure management, something that enterprises can’t pull the plug on quickly.

The industry is also quick to point out that falling IT shares should not be perceived as an accurate indicator of fundamentals, especially in exceptional situations like now.

“Foreign institutional investors own large shares in some of the big IT companies. When under pressure, exiting them is the best option,” said Rostow Ravanan, CFO at MindTree, the Bangalore-based mid-sized firm. “That doesn’t mean they have no confidence in the industry.”

Kishor Patil, managing director and chief executive at another mid-sized IT firm, KPIT Cummins, said its “too early to comment”, on which way the fortunes are headed, but attributes local stock swings to “volatility in the US and Europe”. Patil emphasised his company is yet to feel any impact so far.

In an attempt to map the risk profile of large Indian IT firms, Ankur Rudra and Subhashini Gurumurthy, analysts with brokerage Ambit Capital, did an analysis of their exposure to discretionary technology spend (that which can be stopped without affecting the core business) and to affected geographies such as the US and Europe.

“Wipro has the best ratio of low US/EU exposure along with low BFSI (banking, financial services, insurance) exposure and high proportion of non-discretionary revenues, with HCL Technologies being a close second, although the latter has a higher proportion of non-discretionary revenues,” Rudra and Gurumurthy said in a note on Wednesday.

“So from a snapshot basis, the pecking order would seem like Wipro, HCL Tech, TCS and Infosys,” they said - in terms of ascending risk.

Reflective of the pensive mood in the industry, MindTree’s Ravanan said “if the uncertainty continues for long, we might see some decisions getting delayed, but as of now things are fine.”
Could there also be a positive fallout, a silver byte, as it were?
“It is possible — a slowdown in the US will force companies there to outsource more to save cost, which can be beneficial for Indian IT firms,” Purushothaman said.