No prizes for guessing the mood in information technology corridors this earnings season
BANGALORE: No prizes for guessing the mood in information technology corridors this earnings season. Guidance revisions, sharp cuts in hiring targets, and gloomy commentary on future prospects will be the order of the day as the tech sector prepares for the silent period ahead of the third quarter earnings season early January.
Gone are contrarian theories and brave talk one heard at the end of the second quarter, when despite cutting their dollar guidance, some IT firms felt India would actually benefit from the subprime crisis-led slowdown in the US because American companies would try to cut costs and offshore more work.
But the bravado is now turning to fear, with Indian IT services companies beginning to realise that price cuts offered to clients are not necessarily resulting in higher business.
Conservative as it is, Infosys Technologies, India’s second largest IT services company, has been candid enough to admit there’s pain ahead.
Senior company officials indicated that contracts are not only being delayed but also cancelled in some instances. Kris Gopalakrishnan, chief executive officer, went to the extent of stating the industry would grow only 15% this fiscal, much lower than the growth projection of 21-24% by industry body Nasscom.
Not surprisingly, a slew of analysts last week thought it fit to put out cautious calls on the sector, beginning with Infosys. In a report last week, CLSA analysts Bhavtosh Vajpayee and Nimish Joshi said even pricing compromises wouldn’t help Infosys till financial year 2009-10 (FY10) given the current scenario. “Volume growth upside from pricing compromise will not come before second half of 2009-10 (H2FY10),” they said. Prices would fall at least 4% by then, the report added.
In another report on Infosys, Apurva Shah and Jaspreet Chhabra, analysts with Prabhudas Lilladher, said aggressive competition from peers is taking a heavy toll on pricing. The demand is weak and pricing behaviour by competition has turned aggressive in new contracts. According to Infosys management, there have been instances of local players winning deals at half the usual offshore US dollar rate, the report added.
However, V Balakrishnan, chief financial officer, Infosys, said the company hasn’t taken a hit on its prices yet but if the market slips further, might have to give in. “So far, we haven’t compromised. But if the economic situation worsens, it (price cut) could come,” he added.
Wipro, the country’s third-largest IT services company, is feeling the pinch too. But global investment banking firm Credit Suisse, which hosted a conference call with Wipro’s CFO Suresh Senapathy, felt these pressures could be offset by higher volumes from bigger clients. Realisation in these deals, however, could be lower, Credit Suisse added.
It’s not just domestic IT services firms that are reeling under the slowdown. Global giants such as Sun Microsystems haven’t stayed unaffected. Valsan Ponnachath, director (services practices), Sun Microsystems, said the slowdown could last anywhere from 18 months to three years.
As a result, enterprises have become cost-conscious and are looking to rationalise. “The deteriorating environment forced the hand of Indian IT companies in terms of US dollar annual guidance reduction in second quarter of FY09. We fear a repeat of the same in the third quarter,” said Shah and Chhabra of Prabhudas Lilladher.
p_sharma@dnaindia.net
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