AFTER DIFFICULT YEAR, IT BRACES FOR US DOWNTURN

AFTER DIFFICULT YEAR, IT BRACES FOR US DOWNTURN
Anil Penna, Bangalore, January 7, 2008
Mint

After weathering a tough 2007, India’s flagship IT companies face the spectre of the US economic slowing and squeezing profits as they start unveiling earnings this week, analysts say.

Software firms such as Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd were last year roiled by the rupee’s steepest appreciation against the dollar in three decades, surging wages and real estate values and the end of a tax holiday.

Now come possible cutbacks in the information technology budgets of US clients preparing to tighten their belts as a housing slump, tighter credit and high energy costs take their toll on the world’s biggest economy.

“The negative view is that US corporate budget growth will slow and we won’t see as much demand for outsourcing and offshoring as we saw last year,” said Suveer Chainani, technology analyst at Macquarie Capital Securities in Mumbai.

“Most people’s perception is drastically negative.”

Clues to the extent of the fallout may surface when Bangalore-based Infosys kicks off the corporate earnings season on Friday by announcing its fiscal third quarter results.

Investors hammered the shares of IT companies last year as the bad news kept piling up. IT stocks trailed the benchmark Sensex by more than 40% in 2007 and no relief is seen by analysts in 2008.

“The rising risk of an IT spending slowdown raises the hurdles on a 12-month view and we remain underweight on Indian tech,” investment house CLSA said in a report.

“Barring periodic deviations, we see absolute long-term annual stock returns of 10-12%, down from the heady 30-40% of the past,” CLSA analysts Bhavtosh Vajpayee and Nimish Joshi said in the report.

Sentiment remains negative although IT firms have remained profitable. TCS, India’s biggest software services exporter, reported a second quarter net profit jump of nearly 23% to Rs 1,251 crore.

Infosys saw its profit in the quarter ended 30 September rise 18.4% to Rs 1,100 crore Wipro’s profit climbed 18% to Rs 8,23.7 crore.

The US is the biggest market for Indian software and service exports, which jumped 33% to $31.4 billion in the year ended March and are forecast by the industry grouping National Association of Software and Services Companies (Nasscom) to reach $60 billion by 2010.