IT cos to see through US slowdown
The share of Europe in IT revenues has been increasing continuously over the years which will act as a cushion.
By Vidhika Sehgal & Javed Sayed , TNN |
The last time the US economy went into a tailspin in 2001, the Indian software services industry took a big beating. US GDP and Indian IT revenue growth have shown significant correlation in previous years, and with the US economy showing signs of a possible slowdown, concerns about the implications on the Indian IT sector are on the rise. IT analysts, however, believe the industry has matured substantially over the years, and only a prolonged slowdown could have some impact on the sector. And so, while the sector is vulnerable to a possible US slowdown, the situation is not likely to be anywhere as bad as it was in the early 2000s.
The US GDP growth of 2.9% in the June-ended quarter was much weaker than the growth of 5.6% in the previous quarter and also less than the 3.3% growth in the quarter ended June 2005. The US is the largest market for Indian software services and accounts for 50%-60% of the revenues of large Indian offshore players such as Infosys, TCS, Wipro and Satyam.
According to a Morgan Stanley report, revenue growth in the Indian IT sector moves in tandem with the US GDP growth, with a two quarter lag in the impact. If the US economy slows down, US IT spending gets impacted and consequently offshore IT services are affected, too.
Adds Mr Sunil Chandiramani, national director and partner, Ernst & Young: ”A slowdown in the US economy is likely to have an impact on India’s trade, especially in the IT sector where US is the key market. Therefore, on a pessimistic note, one could expect a squeeze on the pricing as well as projects being put on a slow burner.”
However, analysts believe that the Indian IT industry is not as vulnerable as it was in 2001. According to Morgan Stanley, Indian companies were much smaller then and therefore more susceptible. For instance, the revenues of Infosys were around $0.4 billion in FY01, compared to its guidance for FY07 at $2.9 billion. As companies have grown in size and gained experience, their risk management processes are well in place.
Secondly, the concept of offshore outsourcing was not very well established then and therefore customers stepped back when the slowdown happened. Overtime, offshore outsourcing has become a widely accepted phenomena and customers may not want to hold back in case of a slowdown.
The US GDP growth of 2.9% in the June-ended quarter was much weaker than the growth of 5.6% in the previous quarter and also less than the 3.3% growth in the quarter ended June 2005. The US is the largest market for Indian software services and accounts for 50%-60% of the revenues of large Indian offshore players such as Infosys, TCS, Wipro and Satyam.
According to a Morgan Stanley report, revenue growth in the Indian IT sector moves in tandem with the US GDP growth, with a two quarter lag in the impact. If the US economy slows down, US IT spending gets impacted and consequently offshore IT services are affected, too.
Adds Mr Sunil Chandiramani, national director and partner, Ernst & Young: ”A slowdown in the US economy is likely to have an impact on India’s trade, especially in the IT sector where US is the key market. Therefore, on a pessimistic note, one could expect a squeeze on the pricing as well as projects being put on a slow burner.”
However, analysts believe that the Indian IT industry is not as vulnerable as it was in 2001. According to Morgan Stanley, Indian companies were much smaller then and therefore more susceptible. For instance, the revenues of Infosys were around $0.4 billion in FY01, compared to its guidance for FY07 at $2.9 billion. As companies have grown in size and gained experience, their risk management processes are well in place.
Secondly, the concept of offshore outsourcing was not very well established then and therefore customers stepped back when the slowdown happened. Overtime, offshore outsourcing has become a widely accepted phenomena and customers may not want to hold back in case of a slowdown.
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Thirdly, diversification of revenue streams has helped Indian IT firms to penetrate services where they currently have a very small proportion of the global market. Even a small increase in services such as infrastructure management, testing and engineering services results in a substantial revenue and margin growth.
Moreover, geographical diversification has also begun to take place and companies are focusing on the European region a great deal. The share of Europe in IT revenues has been increasing since the last couple of years, whereas the share of US has been declining. There is also a feeling that a weakening US economy could throw some pleasant surprises such as a relief from the spiraling wages and a further depreciation of rupee.
“A slowdown could force more US companies to look towards India as a cost effective destination for outsourcing their work,” says Mr Chandiramani.
ET Intelligence Group
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