The down grading of US credit rating by Standard & Poor's and the recessionary pressures that preceded it, will inevitably impact the Indian IT services sector – but how much and how seriously? The mood in India, right now, remains upbeat with software industry bodies making positive noises even as the pink papers reported that bellwether IT players were taking a licking at the bourses.
The Economic Times reported, August 9 on the fate in the bourse of India’s Big 3 It players: “Driven by heavy sell-offs amid anxiety over the US economy's health, shares of IT companies today fell further on the bourses with sector heavyweights, TCS and Infosys leading the list of losers. Shares of TCS settled 4.16 per cent lower at Rs 967.25 on the BSE. During the day the stock shed 6 per cent. Investors also flee from other IT blue-chips, like Infosys and Wipro.
Infosys plunged 3.68 per cent to close at Rs 2,377.10, while Wipro's stock went down by 3.18 per cent to end at Rs 347.25. Infosys slipped to its one-year low level of Rs 2,350 during the day”. http://economictimes.indiatimes.com/markets/stocks/stocks-in-news/it-cos-shares-fall-on-heavy-sell-offs-over-us-economy-concerns/articleshow/9542770.cms
The National Association of Software and Service Companies ( NASSCOM) sees a window of opportunity in the crisis:
“In recent developments, there has been a downgrade of Standard and Poor’s credit rating of the United States of America. This has led to a number of projections from analysts and economists indicating the possibility of a double dip recession in the US economy.
The economic crisis in the US, unfolding over the last few days, does not have any major bearing on the country’s private sector. Although the global economic environment is a cause for concern, it is not likely to impact the Indian IT industry, in the near-term future. The industry is closely intertwined with the global economy, and has a burgeoning domestic market which is equipped to sustain growth. Also, the US is, and will continue to be one of the largest markets for us, and in case of an economic slump, we see the Indian IT industry strengthening its partnership with the US customers to build-in greater business efficiencies.
NASSCOM will continue to monitor the developments in US, and hopes that under President Obama’s leadership the US economy will bounce back. We are also counselling the Indian IT sector to maintain a cautious outlook going forward”.
The NASSCOM optimism was echoed by Wipro, whose Executive Director T.K. Kurien was quoted in Mint saying:“In fact, the structural weakness in the economy offers opportunities to IT services companies as we help global corporations variabalize their IT, thus making them fundamentally more adept to compete” http://www.livemint.com/2011/08/08193849/India8217s-IT-sector-sees-o.html?h=B
Glen Serrao, Engagement Manager, Zinnov Management Consulting suggests any impact will be in the long term:
“The S&P downgrade is too recent to satisfactorily analyze the impact whatsoever on the Indian economy as a whole and IT sector in particular. Even top economists and central banks are assessing the impact as I write. From our perspective the impact on IT sector may be minimal in the short term for large companies that work on multi-year long term engagements. The project pipeline for these companies Is built in advance. Any impact due to IT spending slowdown could be reflected in the results of the Indian IT companies later this year or early next year.
Some intelligent guesses could be that the downgrade could impact the US financial system and hence cause tightening of the IT spending by the BFSI sector (which is the key one for Indian IT companies ad brings in almost 40% of the revenue for the sector). The biggest impact could be if USD is devalued and RBI also chooses to allow INR to appreciate in comparison. This will definitely hit the Indian export sector as a whole and IT services in particular as almost 70% of the revenue composition of this sector is exports.
I think the Impact if any on the Indian IT sector will be in the long term. If US slumps into double dip recession and US financial assets and the dollar are reassessed based on the downgrade, then Indian IT sector is not very well diversified to dodge the hit. 60% of the IT revenues still come from US and another 30% from Europe so the S&P downgrade combined with Euro debt crisis could potentially hamper growth in this sector severely.
Even without the downgrade, the IT sector is facing margin pressures due to IT budget consolidation among large enterprises in US, attrition and salary hikes, rise of other global locations and recent concerns around visa violations. USD Vs INR and double digit growth of offshoring in the whole outsourcing pie, is the key that keeps this sector running. Any change in the two will impact the IT sector”.
On a more general note, Dinesh Thakkar (Chairman and Managing Director, Angel Broking) said:
“Unlike in the last crisis which came at the peak of the bull market when valuations were quite expensive, this time around valuations are already at reasonable levels. Yes, markets could be re-calibrated a little lower since growth prospects in the near-term look a little weaker, but I do not expect a Lehman-like situation. The US and Euro problems do add to near-term uncertainty which will lead to range-bound movement in our markets in the near-term. At the same time, due to a US slowdown, lower commodity prices would be beneficial for India. For India, domestic issues of high inflation and interest rates are having a more direct impact on our growth prospects and I see these peaking in the next quarter or two, until when markets could remain range-bound. From there onwards, the trajectory of our growth in FY2013 is expected to take our markets higher. In my view, there is decent upside in the markets for a long-term investor and this is a good time for bargain-hunting to add quality stocks to one’s long-term portfolio”.
In another straw in the wind, General Electric Co, the entity that pioneered outsourcing to India, creating what is today GenPact, seemed to be busy accumulating brownie points with the US government, announcing plans to bring at least 15,000 information-technology jobs, back to the U.S., over the next three years. For starters, GE’s Centre for Information Technology near Detroit will create 1,100 jobs, Chief Executive Officer Jeffrey Immelt said. GE has hired 660 in Michigan, taking advantage of incentives such as tax benefits that could exceed $60 million over 12 years. Michigan once the epicentre of the US auto industry leads the nation in unemployment
“About 50 percent of the IT work was being done by non-GE employees,” Charlene Begley, GE CTO was quoted saying, in a Bloomberg report, “That strategy may have had its time”. Aug 10 2011