Green shoots for IT

US recovery pulls sector out of the doldrums

Nasdaq-listed Cognizant, which has most of its 163,000 employees in Chennai, is the latest information technology company to report better-than-expected numbers for the quarter that ended on June 30. It has raised its revenue guidance for the full year from $8.6 billion to $8.74 billion. Earlier, market leader TCS, Infosys, Wipro and HCL Technologies too had reported robust growth for the June-ended quarter, which beat all analyst estimates and indicated that a strong recovery for the sector was possible. The numbers show that consumer sentiment has improved significantly in the United States, which is the largest market in the world, because of positive macroeconomic developments. The US economy grew 1.7 per cent in the June-ended quarter, up from 1.1 per cent in the March-ended quarter. Businesses increased their spending by 4.6 per cent, after having cut it by a similar margin in the previous quarter. Unemployment fell to 7.4 per cent in July, the lowest since December 2008. Experts predict that almost a third of US companies will increase their IT budgets by up to five per cent in 2013 over 2012; a quarter might keep it flat. This might not look huge, but it represents an improvement over the cuts made by the same companies till recently.

In addition, four factors augur well for Indian IT companies. One, there is a sizeable pent-up demand as companies have not refreshed their IT systems in the last three or four years. Two, business verticals such as entertainment, healthcare and retail have undergone significant changes recently and their IT systems need upgrades. Three, new compliance norms require companies to invest afresh in IT. And four, companies want to develop capabilities in emerging areas, such as mobile commerce, that need fresh IT plumbing. With limited budgets, companies are increasingly outsourcing work to low-cost service providers. Also, Indian companies have reported that discretionary IT spending is back after being cut in the slowdown, which is good news for Indian IT service providers. These are large multi-year deals that bring a great deal of predictability to the business of companies. Some companies, such as TCS and Cognizant, have even reported strong growth in Europe. Still, pricing power is yet to return to the industry. That’s because most of the business is from re-bids, where the client looks for rock-bottom prices. Companies are bidding aggressively for these orders. As a result, prices are either flat or, in some cases, even on the decline. For full recovery, prices have to rise. There is no sign of that.

While the US is on the mend, the Indian market has turned lacklustre. The enterprise market has almost dried up. However, the proposed new banks will help companies, such as Infosys, that specialise in the BFSI (banking, financial services and insurance) vertical to get some business. Large deals have become rare now. The government market (largely e-governance) is still alive, but such orders take long to materialise and profit margins are very thin. With general elections due next year, no new large orders from the government are expected in the months to come.