Outlook turning better for software companies

After a year of inclement weather, India’s information technology (IT) sector is spotting some sunshine.

Rishi Jhunjhunwala, analyst with Goldman Sachs is betting on a percentage-point improvement in the 2013 IT budgets of companies, after a global survey of chief information officers.

“This will be driven by better bottom-up growth in US technology and emerging markets,” he said.

Though India's IT sector has continued to underperform over the past three months, he forecasts a 12% dollar revenue growth in next fiscal, with 2013 global IT spending growth pegged at 3% versus 2% in 2012.

Industry analysts have for some time been predicting a bottoming out of the debt crisis in the US and Europe, which has led to companies like TCS already reporting increase in client discretionary spends. This, in turn, has led to better deal flows, albeit smaller, fragmented ones.

Sid Pai, partner in research and consulting firm, Information Services Group (ISG), said after elections, the US has been upbeat about economic recovery, largely led by manufacturing.

“This is also expected to reflect in better spending outlook in the budget. In the second and third quarter of calendar 2013, discretionary spends are also expected to pick up after more than a year. Thus, despite continuing fiscal issues in Europe, overall uncertainty is gradually clearing, which is good news for IT business,” Pai said.

As per the Goldman Sachs survey, in the US, S&P500 firms have $1.2 trillion in cash, with cash/asset ratio at 10.8%, near the all-time high.

Thus, despite a weaker second half of fiscal 2013, due to conservative spending and the upcoming fiscal cliff leading to delay in the budget finalisation process, better growth is expected in fiscal 2014 if uncertainty around the fiscal cliff subsides.

Dipen Shah of Kotak Institutional Equities points out that new smaller companies are also opening up to outsourcing, indicating new client additions for IT companies.

For HCL Technologies, which is focused on tapping new deal restructuring pipeline in IMS, and for TCS which has strong concentration on discretionary spends, this is good news, indeed.