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.

Is TCS the worst affected Indian IT major in the ongoing financial crisis?

Is TCS the worst affected Indian IT major in the ongoing financial crisis? This is a question that came to my mind when the TCS stock was getting hammered on the bourses. I thought so since they are huge and have a larger share of their revenues coming from the Financial Services. This is reflected in the share price already. Today I saw this report that confirmed this view. According to this report TCS is likely to bring down the hikes to 0% by 2010 and it also shows how its competitors are doing in this front

For now, the other IT services majors like Wipro has already announced a 7-8% hike in wages for its offshore employees while for Infosys it has been in the range of 11-13%.

I also heard unconfirmed news about HCL not giving the hikes and, worse, even cutting the salaries. News about lay offs are not good for anyone except for the markets which is a positive since its going to cut down costs and improve profitability.

Infosys had come up with a sabbatical policy yesterday which is innovative. We have to wait and see what measures other IT majors will take to cut costs.

RK

Infosys asks employees to take Sabbatical!! What is the Real Intention?

We are in midst of a huge Financial Crisis, that's clear. And its also clear that the impact is not going to be limited to financial sector, the effect is now being slowly but surely felt on industries that are important to the real economy. Even though we, in India, are not part of the core crisis that started in India we still are greatly affected - markets are being hammered, foreign money is being pulled out of the country, promised investments aren't coming, companies depending on exports are closing down and people losing jobs.

IT sector, which is the horsepower that drove India's growth in 90's and which is still the foreign currency earner, is not left untouched. All top Indian IT companies have a decent portion of their revenues from the US Top Financial Institutions. There is a huge concern that these companies will not be able to deliver the same results in the coming quarters as the spending from affected institutions will be cut down and the projects will be shelved. There is also an opposite point of view that thinks US problems will translate into more revenues since US companies will start pushing more work to India.

We have to wait and see which view comes true in the near future. But, right now, I could see the impact. Its not as bad as the technology bubble but its there. No salary hikes, worse some companies cut the salaries, employee weeding in the name of performance, Satyam used wrong claims that were as old as 1 year to lay down a few, and now Infosys have come up with a policy where the employees can take sabbatical from their work to get involved in philonthropic activities.

I cannot comment on their real intentions. I see it as very innovative way of cutting down costs without actually looking like you are in trouble and also earning the good name in the society for its philonthropic inclience. Ofcourse they can easily use it as a tool to increase efficiency by making some of the non-performers take it. So they are not officially laid off, they can still be happy that they get 50% of their salaries.

But this also raises the question how effective these guys are going to be when they come back after an year - will they be refreshed and raring to go or will they be out of touch and find it difficult to get going? And also what if the conditions are still bad? Can Infosys just take them and put them on bench? And will they really keep on their promise of taking them back?

I see that it can be effective tool to cut costs in the near term by retaining the guys for half of the costs and having the option of getting them as soon as situation improves. You dont have to spend time and money to recruit new resources and train them on Infosys way.

Infy, this is really a smart way of doing things!