Monday, March 29, 2010

Indian Technology Sector Prospects in 2010

This article appeared in the March 2010 issue of Wealth Insight and was published on value research online.

From reaching starry highs to being virtually written off, to reaching for the skies again, information technology (IT) firms have come a long way. With the pressure of the recession decreasing on the West, they are again bagging new orders and getting old ones extended.
NASSCOM, which is charting this trend, says India’s IT and BPO exports are projected to grow 13-15 per cent in FY11 to $56-57 billion. For this fiscal, IT and BPO export revenues are seen growing 5.5 per cent to $49.7 billion. Added to the equation is the sizzling domestic demand for IT products.

The domestic market in this fiscal is expected to reach Rs 66,200 crore in revenue, which is a growth of 12 per cent over last year. Also, the next fiscal is expected to be better on the domestic front on greater public spending on e-governance. Even private companies are splurging on automation especially in retail, healthcare, and BFSI. This is likely to spur the growth rate to 15-17 per cent and revenue is seen at Rs 76,100-77,500 crore.

That the IT story is built on solid ground is evident from the bellwether — BSE IT index. It has consistently beaten Sensex. That does point to the near-term conclusion that the outlook, at least into the next fiscal (FY11), is positive, but beyond that uncertainty is overwhelming.
The good part of the trend is that the recovery of the IT sector had been led by the mid- and small-cap firms, thereby indicating they are getting savvier in promoting their businesses.

The top five firms have been treading a healthy path too with three of them logging a jump in net profits year-on-year (YoY), with Mphasis leading at 211 per cent, while Wipro’s stands at 67 per cent. But, HCL and Infosys net profits were down 35 per cent and seven per cent respectively. Quarter on Quarter (QoQ) the scene changes a little with net profits of Infosys rising almost 2 per cent. Wipro and HCL’s QoQ were negative. Mphasis has dominated on the net sales front, which surged 248 per cent as per December, 2009 data.

Prospects, going forward, for the industry remains positive. Take for example Infosys. The projected income growth YoY is anything between a range of 0.7 per cent to 1.5 per cent for the quarter ending March 31, 2010. BRICS Research summarises: “IT companies are expected to post better performances in FY11, but most of this is already factored in stock prices.”

On markets, the four top companies HCL, TCS, Wipro and Mphasis, barring Infosys, have posted over 200 per cent returns since the bull-run till February 23, 2010. Infosys returns was 115 per cent. Having gained handsomely, the valuations are already high, and prospects for upward movements are limited.

However, since, the industry’s fate is closely connected to the US economy, risks abound, especially as the unemployment rate there is going to stay high well into FY15. This indicated the US economy is going to log very slow growth, and IT companies here will chart a similar trend.

Budget 2010-11 will hit the IT sector too as it made no mention of the extension of a tax holiday scheme which ends in March, 2011. Also, the hike in Minimum Alternate Tax (MAT), which has been raised from 15 per cent to 18 per cent of book profits, will impact them adversely too.

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