Indian IT has it pretty bad right now. he furore over financial bunglings by the promoters of Satyam Computer is still raging, and news has it that Wipro has been barred from contesting for direct contracts from the World Bank for four years beginning June 2007 on charges of bribery. Wipro made the disclosure only on Monday.

The third quarter earnings season is about to start. Typically, the information technology companies are the first to announce quarterly results.

Things really do not look too good for them even though some experts would have us believe otherwise. The IT firms are not saying much right now, suggesting the problem is deeper than it appears.

One could look at this from two angles: from the perspectives of an end user and an IT services company. End user perspective: For end users, IT cost can be across two dimensions — new implementations/ upgrades and maintaining and supporting existing applications.

Nw implementations/ upgrades are high-cost activities. These are desired functionalities in the IT landscape. It is naturally prudent that companies will not be investing in the ‘desired state’ when fundamental demand for their products/ services are not happening.

Maintaining and supporting applications is a set of operational activities in IT, which end user companies must necessarily do for day to day running of their business. Companies typically enter into multi-year outsourcing contracts with service providers.

Given the impending slowdown, bailouts and the capital tap drying up for brick and mortar companies, what would they focus on? Would they focus on running their business or investing on cost functions such as IT?

It is more likely the chief executive officers would choose to spend on maintaining and supporting existing applications and budget permitting, on completing projects that are nearing completion.

Maintenance and support functions typically fall under the application development and maintenance (ADM) services offering. The typical revenue from ADM is 42.7% for Infosys and 49.2% for TCS (Source Q2 FY09 fact sheets and announcements).
From a sector perspective, we have seen the near collapse of the financial sector and the automobile sector. Infosys derives 33.4% of its revenues and TCS 41.9% from the BFSI sector. With BFSI in a readjustment mode, it will take a while for these companies to get big ticket contracts. Existing outsourcing contracts might continue, but might come with lower prices. The other sectors serviced by Indian IT companies have also started feeling the heat.

However, some experts are of the view that the ongoing crisis would bring its own set of opportunities.Management guru Pankaj Ghemawat had told this newspaper in a recent interview, “But again, every crisis has its own opportunities.

Just to talk about just a little bit from the perspective of the company I know best, TCS... They work for both Bank of America and Merrill Lynch (Bank of America bought out Merrill Lynch). So you know maybe they are in a good position to try and get some work on the integration process such as integration of pre-existing and incompatible architectures.”

Ghemawat also talked about how agile companies are in a situation like this. “TCS also actually helped do some of the work for the Resolution Trust Corporation, if I am not mistaken, on the savings and loans institutions bailout that happened in the US in the eighties. So obviously, the company is not coming from a standing start when it comes to thinking about what kind of opportunities will help clients as the present situation unlock.”

But, how much of this can be converted into actual revenues? That remains to be seen.
Some amount of slowdown in revenues was cushioned by the depreciation of the rupee. One dollar was worth around Rs 39.5 at the end of December 2007. This is now fluctuating in the Rs 47-50 range.

But the chances of the Reserve Bank of India allowing the rupee to fall more are highly bleak. Hence, the chances of a depreciating rupee adding to revenue growth in the coming quarters are low.

It also does not help the cause of the US dollar that the US Treasury is printing a whole lot of dollars to tide over the current financial crisis. Experts expect this to have an impact on the value of the dollar in the days to come. It is largely expected that dollar will soon start to depreciate against other currencies. Given this, chances are that IT companies will have to hedge against this risk by signing contracts in currencies other than the US dollar. Yet, with the majority of their clients being US-based, this may be easier said than done.

Investors looking to invest in IT stocks should keep all these factors in mind.