IT’s slowdown pangs may last a while

Analysts, experts see little improvement  in tech spend before mid-2009

BANGALORE: The recessionary pain could last longer than IT companies would have us believe.

Many tech majors have predicted that the second half of this fiscal would be better than the first. But, analysts and industry experts say it’s wishful to think the turnaround would come so soon.

Ganesh Natarajan, chairman of industry trade body Nasscom, says the current slowdown in the western economies could last for another six to nine months. Indeed, a recovery in the macro-economic environment before the middle of next year is unlikely. And even this may be an optimistic view.

“It is not a V-shaped recession, where you enter and exit fast. It looks more like a protracted U-shaped recession,” says Natarajan.

Global IT spending has dwindled over the last two years, with the US and European markets slowing down.  And there is further deceleration ahead.

Going by IT research firm Gartner, growth in global tech spend in 2009 will decline to 6% as compared with 8% in 2008 and 10% in 2007.

And banks won’t be alone in slashing IT budgets. Natarajan sees the impact of the slowdown being broader, and spreading to beyond banking, financial services and insurance.

Edelweiss analysts Viju George, Kunal Sangoi and Nikhil Chakrapani say as much in an August 11 report. “Not only is the (current) slowdown likely to be protracted but with broader impact, it can affect decision-making on tech spending across verticals.”
And with companies reducing IT spend, volume growth cannot but take a hit even as pricing pressure is building up.

Morgan Stanley analysts Vipin Khare and Gaurav Rateria write in a report on Thursday, “We are more inclined to believe that between volume and pricing, volume growth remains a bigger issue as of now.”

The analyst duo expects the current crisis to spill into the first half of next year. “With 10 US bank failures in the last 12 months versus none in 2005-06, we see limited chances of the current uncertainty fading away soon and would expect running investment concerns on spending delays and pricing to roll over into 1H09.”

Some signs of prolonged suffering are already visible in the performance of the IT majors in the first quarter of this fiscal.

“Any optimism on guidance outperformance that investors may have had in the middle of the first quarter of FY09 has tempered. We see select Indian companies doing well, reiterating their FY09 guidance after a not-too-enthusing first quarter,” Edelweiss analysts write.

Sudip Nandy, president—technology, media and telecom, Wipro Technologies, would rather not hazard a guess on how long the slackness in the western economies would last.

He, however, maintains that the impact of slower economic growth is more client-specific than sector-specific. “It’s a little client-specific. My guess is that the scene is bad on both buy (customer of IT) and the sell (IT service vendors) side. We are constantly waiting for feedback from different industries.”

It’s another thing that such feedbacks aren’t easy to come by despite longer engagements with clients to get a feel of the industry situation.

Though Wipro has not seen any cancellation of its existing projects, decision-making by clients is taking longer. “Sometimes, customers are stretching contracts (sales cycle) because of cash-flow problems,” says Nandy.

But, Natarajan likes to believe all this won’t be very damaging for the toplines of software companies. “While this is a wider and deeper slowdown, it will not have any long-term impact on revenues.”
p_sharma@dnaindia.net