Analysts, IT split over growth outlook

The confidence of Nasscom and leading local information technology (IT) service providers over sustainability of the industry’s growth rate in the wake of the economic turmoil in the developed world is not all-pervasive.

Divergent views are emerging. Swiss brokerage UBS on Wednesday lowered its compounded annual growth rate (CAGR) earnings forecast for the industry over the next five years to 10-16% compared with 30-35% seen in the 2003-2009 period.

Even global sourcing advisory firm TPI’s index has shown weakness in deal flows in the first half of this fiscal, an indication IT demand and spending were slowing down. In fact, in the past few quarters TPI Index was weakest in the last 10 years.

And since Indian vendors now comprise a much higher proportion of the TPI index, there was higher correlation between US dollar revenue reported by large Indian vendors and the total contract values (TCVs) published by it.

In 2010, Indian vendors constituted close to 20% of the TPI Index and close to 25% of the total number of deals monitored by TPI as against 9% of deal wins and 5% of contract value in 2005.

UBS analyst Diviya Nagarajan in her report published on Thursday also claimed there are early signs of dip in demand as large financial institutions (FIs) in the US and Europe resort to downsizing and austerity measures to cut costs. Revenues from FIs comprise 40% of Indian IT exports.

“The macro environment has also taken a turn for the worse with the recent downgrade in the US credit rating by Standard & Poor’s. We expect the weakening macro environment combined with the ongoing weakness in deal flows as reported by TPI, to impact demand for the sector by late 2011/early 2012,” said the UBS analyst.

Nagarajan believes “amplified pricing and margin pressures in a tight demand environment will make it more difficult (for local tech companies) to gain market share.” 

“We believe that a slower demand environment will amplify this effect on competition and make market share gains more expensive due to pricing and margin pressures,” she wrote in her report.

Nagarajan and TPI’s views were in contrast to IT industry lobby Nasscom’s president Som Mittal’s, who feels there was ‘no reason to be worried’.

He has also refrained from revising sector’s growth outlook of 16-18% for the year to March 31.

Tata Consultancy Services declined to comment when asked about the possible impact of economic uncertainties in Western economies.

“Our discussions with our members as well as our discussions with our clients indicate that they are not cutting back at this point,” Mittal told reporters on the sidelines of a recent industry summit in New Delhi.