Mixed outlook for IT

Indian companies' fightback will take time to deliver

Investors in the information technology (IT) sector will be anticipating the first-quarter results for the current year with mixed feelings. Certainly, there is optimism about the year as a whole. After all, this export-oriented industry will deal with an increasingly buoyant global economy. The United States has now clocked multiple quarters in which economic activity has revived and jobs have grown. Positive sentiment has also defined the outlook in Britain; Europe - long a laggard - has not pulled things down any further. A global economic revival is good news for those relying on the IT budgets of their clients. These are in any case likely to get a boost as firms work to make themselves fully compatible in a digital environment. Higher spending on IT is vital for companies struggling to firmly plant themselves in the social mobility space - both to be able to hear and to be heard. Retail spending on IT-driven products - from tablets to wearable computing - should increase as well; and so client firms' investment on product development is also likely to get a firm push forward.

But an ambivalence emerges when looking at expectations from the short term. The past quarter has seen an appreciation in the value of the rupee against the dollar, a trend which the Reserve Bank of India will have to fight hard to arrest. While this will impact rupee earnings, strong pressure will emerge from the cost side. The quarter has seen both routine annual cross-industry pay rises and higher visa costs. These will likely exert pressure on margins, which the industry is strategising hard to combat. Annual pay increases will be taken for granted by staff who see demand momentum building up all around. Higher costs emerging from visa fees to be paid to place engineers at customer locations are totally beyond the control of the industry. Further, first-quarter domestic orders will not show any revival in demand, which can only happen once the new government is able to revive business sentiment by its actions.

There are several weapons available to the sector to combat this cost-push momentum. The foremost is to work harder at the automation of routine tasks, so that increases in staff productivity stay ahead of costs. Along with this, the industry will have to fight for and secure more and more complex tasks - those at the core of their clients' strategies. They will have to have the confidence to outsource core research and development; and Indian vendors, particularly the trade's leaders, will have to show clients that they are up to the task. As more of this happens, vendors will also go up the value chain and improve their operating margins. There is every reason to believe that the sector will be able to live up to this challenge - but this fightback may not have paid off in the first quarter. Thus, investor sentiment will have to remain positive by discounting the likely negative aspects of the first quarter.