Discretionary spend not back to 'normal levels': Ambit

Analysts say clients breaking down large orders, pursuing only high priority areas

At a time when investors and experts are cheering for the Indian information technology (IT) services companies in view of the revival in discretionary spending by clients, brokerage firm Ambit Capital has said that this uptick has not recovered to ‘normal levels’ and is limited to only short-term projects as of now.

Clients are breaking down larger projects into smaller parts and pursuing only higher priority components, analysts Ankur Rudra and Nitin Jain said in a note titled ‘What the Tech!’ published based on interactions with IT industry participants at the Nasscom Leadership Summit earlier this month.

“While acceleration in growth rates in discretionary spending is clearly positive, most of this is driven by shorter term projects. Our interactions with industry advisors and client and vendor executives indicate that large discretionary projects have still not recovered to normal levels,” the note said. “The clients are more willing to break-down the projects into smaller parts and pursue the more critical and higher priority parts of the projects.”

Most Indian IT services companies have been witnessing a rise in discretionary spending over the past six months. This was probably the reason why most of the players posted robust growth in the October-December quarter of FY14, which is typically a seasonally weak period.

In January, TK Kurien, CEO of India’s third largest IT services company Wipro, had told Business Standard that “discretionary spending is going up in the US after many years. Earlier, people used to give us discretionary spending for a quarter, but there was no continuity. Now, we know what it is going to look like for the next two quarters. Even though it is not common across all industries, we are seeing this trend.”

Even as most believe that 2014 would be a better year for Indian IT services sector than 2013, some analysts have cautioned against the belief that discretionary spending is here to stay. The view has found several believers after US-headquartered Cognizant, which follows the same offshore delivery model like Indian IT services companies, posted a modest Q4 revenue growth and shared a conservative revenue growth guidance of 16.5%. Analysts believe that the guidance does not factor in any significant uptick in discretionary spending.

Calling Cognizant’s guidance a ‘reality check’, analysts say that while Cognizant benefited from the uptick in discretionary spending during the April-December 2013, it is too early to assume that the trend will continue going forward.

However, going by the historic data, Ambit believes that the possibility of Cognizant revising its guidance upwards cannot be ruled out.