TPI to tech stocks’ rescue, says worries sentimental

Worries of the ongoing global economic turmoil impacting the revenue growth of Indian information technology companies are unreal, feels TPI, the world’s largest third-party outsourcing advisory.

“No impact on client decision making yet from the economic crisis. TPI believes the fear is more sentimental than real,” Nomura analysts Ashwin Mehta and Pinku Pappan said in their latest sector report.

“TPI continues to maintain that outsourcing deal signings in second half of calendar year 2011 would be better than that in first half, and expects near $50 billion worth of total contract value to be signed in the second half despite just $37 billion worth of signings in first half,” the analyst duo noted. The report follows an interaction with Dinesh Goel, partner at TPI, who was basing his views on TPI’s own order bookings, competitor data and interactions with service providers.

The reassurance comes at a time when brokerages are queuing up to downgrade Indian IT stocks to factor in the perceived impact of a potential slowdown in the US and the ongoing sovereign debt crisis in Europe — two geographies that contribute as much as 80% to the revenues of Indian IT companies.

Quite a few have downgraded the sector and revised earnings per share estimates for Indian IT stocks even as the sectoral index of IT stocks on the Bombay Stock Exchange has shed nearly 9% over the last three trading sessions alone on fears of a severe demand slowdown for Indian IT firms.    

To be sure, TPI data do not capture client mining related business as it is not tendered. Mining refers to incremental business won from existing clients of a service provider. TPI data also do not track deals smaller than $25 million, which according to Nomura make up $40 billion worth of technology outsourcing every year.

“Third party advised business (as opposed to direct vendor engagement) could be of the order of 1/3rd of total deals signed,” noted Mehta and Pappan. “Of this 1/3rd business, TPI is the largest player with ~50% market share. The advisory business has shrunk from ~50-60% a few years ago to current levels of 1/3rd.”

The TPI commentary corroborates management commentary from Indian IT services firms such as Tata Consultancy Services, Cognizant and HCL Technologies, all of whom have said they expect robust revenue growth to continue through the rest of this fiscal.

Late last week, Infosys, India’s second-largest IT services exporter, had reiterated its earlier growth forecast of 19-21% for the current fiscal, despite the slowdown fears. The management also said that there have been no project cancellations or client requests for price reductions.