IT sector: No crisis brewing

New locations turning to outsourcing, annuity deal renewals will add to gains

Even as most technology firms failed to deliver on dollar revenue growth in the December quarter, the latter cannot be termed a washout, analysts say. A weak rupee shored up margins and profits, which became the predominant theme of the quarter. However, Infosys pricked the bubble of euphoria with its less-than-convincing commentary. According to CLSA, utilisation levels took a hit, as volume growth failed to keep pace with hiring.

Given the current demand climate, analysts are not expecting any revenue upside over the next few months. Also, the margin improvement witnessed on a weak rupee does not seem sustainable. The good thing is that attrition has declined, thanks to stagnant volumes. On the back of this, companies are confident of single-digit wage increases, which could drive margins in the coming financial year.

So, what’s in store in FY13? Analysts say the gloom is overdone. Most believe the sector would easily clock 14-15 per cent growth. One theme most are betting on is the renewal of big annuity deals. Given the macro uncertainty, Standard Chartered Securities’ Pankaj Kapoor expects Indian vendors to have a higher share of relatively small deals. First-time buyers, especially in Europe, could contribute to this. Kapoor says: “At least 249 deals, worth $47 billion, due for renewal in 2012, could convert to a $6-billion opportunity for large offshore vendors.” These could contribute 26 per cent of incremental revenues of the top four players in FY13.

No doubt discretionary spends may see some pressure, but analysts believe specific triggers may create opportunities for Indian IT services companies. For instance, banks will need to raise technology spends to comply with the new Dodd Frank Act. Over FY13-15, this regulation alone could spell a $5-billion opportunity for Indian firms. Some, like Infosys and Cognizant, are ahead and have domain expertise, too.

Despite the weak commentary by Infosys, there seems no evidence of budget cuts or prices. According to Morgan Stanley, companies may not find it very difficult to outperform beaten-down revenue growth or earnings growth expectations for FY13. Though the sector is unlikely to outperform till there is more clarity on the demand situation, most analysts expect a positive surprise on that front, as FY13 progresses.