Signs of IT sector stabilising

Turbulent 2012 is history for the information technology (IT) sector. A relatively more stable 2013 is the present and immediate future, say IT industry observers.

For, volatility – in services pricing, currencies, orders and macroeconomic aspects – is bottoming out.

A Fitch report on the IT sector outlook for 2013 says Indian firms can look forward to a stable credit profile and liquidity, despite growth continuing to be muted.

According to Fitch, growth is expected to be led by an increase in discretionary spend after almost two years. This comes despite smaller budgets for IT spend, since decision-making is likely to be faster, resulting in improved deal inflow.

A report by Kotak Technology states that a clearer view on discretionary spending would be visible this week or next when IT firms start allocating budgets for projects.

Kotak's analysts Kanwaljeet Saluja, Rohit Chordia and Shyam M said in a report last week that “tier-1 IT companies reported creditable performance despite concerns of client shut-downs and soft discretionary spending. This translated into moderate revenue growth”.

Other factors like realisation improvements and cross-currency benefits despite muted volume growth also aided revenue growth, as did better performance from key verticals like BFSI (banking, financial services and insurance) and manufacturing, despite earlier-than-usual client shut-downs.

“TCS highlighted that timely completion of budgeting process along with better clarity on areas of spending will likely lead to better 2013 than stop-start 2012,” said the Kotak trio.

Significant pick-up in non-linear revenues, and change in overall business mix of top-tier IT companies towards that end, are also seen driving growth this year. This is expected to make IT firms such as Infosys and Wipro focus aggressively on winning deals.

Mergers and acquisitions are also under focus at Infosys, Wipro, Cognizant and TCS, after a couple of subdued quarters.
R Chandrasekaran, group CEO (technology and operations) of Cognizant, said, \\\"We see stable demand outlook in FY14 for both Cognizant and the IT sector, thanks to pricing stability, higher discretionary spends, good repeat business, large transmission and long-term deals."

Fitch expects the M&A activity to continue as companies seek to gain domain expertise. This will in turn help improve their ability to bag projects. Furthermore, acquisition targets are likely to be companies offering non-linear solutions like analytics, cloud computing and mobile services, particularly in Europe where valuations have become cheaper due to difficult economic conditions.

“Other preferred destinations are the Middle East, Asia-Pacific regions like India, Singapore and Australia. Another area of interest would be in gaining access to long-term government outsourcing contracts in the US, France, Germany and Japan,” Fitch said in its report.

Rumit Dugar of Religare expects dollar revenue growth in the next fiscal to be in the range of 13-15% for tier-1 IT companies and 10-13% for mid-tier firms.

While this is a marked improvement over the single-digit guidance for this fiscal by some companies, there are still reasons to remain cautious.

Factors like multiple sourcing – showing a continued break-up of large deals, currency headwinds, adverse regulatory developments in key markets like the US and Europe – and large dividend pay-outs or share buybacks made, are expected to prolong muted growth for some time.

“Wage inflation due to a large offshore workforce and higher attrition due to contracts getting shorter, may also be risks to growth,” the Fitch report said.

Other concerns are frequent pricing changes due to change in business mix, volatile Europe growth, larger benches and more income from volatile non-linear revenues as compared to traditional application development and maintenance or ADM revenues. All these may likely pull down operating profit margins.

“The Indian IT industry has become a lot more cyclical where predictability of the business seems to be deteriorating as evident from volatile performance and extreme swings in the commentary of companies,” the Kotak report said.