BANGALORE: Despite two of
India's largest software exporters reporting better-than-expected
results during March quarter, multiple data points suggest that demand
recovery for the country's $108-billion (Rs 5.9 lakh crore) information
technology services sector may not be a given yet. "There is a return to
growth, but demand recovery is patchy and volatile," said Siddarth Pai,
president for the Asia-Pacific region at outsourcing advisory ISG. "The
pace of growth will be nowhere near what it used to be in the
pre-crisis era."
According to ISG, outsourcing activity sagged in the first three months of 2013, when total value of technology contracts outsourced fell by about 30%, both sequentially and from a year ago. On Friday, when Wipro, India's thirdlargest software exporter, reported stagnant sales and issued a bleak outlook with possibility of sales shrinking in the June quarter, global technology bellwether IBM missed earnings estimates for the first time in eight years. Shares of IBM, which weathered the 2008-09 financial crisis without missing a beat, tanked 8% on the New York Stock Exchange. Three weeks ago, Accenture said it expects sales to grow at below the mid point of its 5-8% guidance for the year to August 31. The software services and consulting company blamed lower-than-expected discretionary spend by corporations, especially in Europe.
Nearly a month ago, in mid-March, enterprise software maker Oracle reported worse-than-expected results, sending its shares sliding 7% on the Nasdaq. "With such divergence in growth rates at top firms, IT sector growth expectations have clearly come down," said Harit Shah of Nirmal Bang Institutional Equities "We might see a small uptick in technology spending, but the general consensus is that markets such the US are going to remain the same, especially after earnings from Oracle and Accenture, which said discretionary spending is negative."
The top four Indian IT companies — TCS, Infosys, Wipro and HCL Technologies — said that discretionary spend remains muted. Even for TCS, which reported sequential growth of 3.1% and backed it up with bullish management commentary, growth was muted in the United States, its largest market. TCS' sales growth got a major push from its India business.
"TCS' growth in developed markets was only marginally better than that of Infosys and behind HCL Technologies, which came as a surprise to us," wrote Ashwin Mehta and Pinku Pappan of Nomura Financial Advisory and Securities in a post-earnings note to clients. "TCS' commentary, on the other hand, continues to be positive, with management reiterating its expectation that revenue growth in FY14 would be better than FY13." Significantly, revenue from new software licences declined 2.6% from the previous quarter, against a guidance of 3-13% growth. Sale of software licences are typically considered an early demand indicator for the Indian IT services sector, which gets business related to customising and implementing the new software.
Industry body Nasscom has projected 2013-14 growth of 12-14% for the Indian IT sector, which expanded just about 10% in the last fiscal. Nasscom president Som Mittal did not reply to calls and text messages. While the pace and nature of recovery that awaits Indian IT sector is not clear yet, industry experts said what is certain is that Indian IT companies will have to get used to the uncertainty and learn to survive in the new normal.
"Indian IT sector need to embrace the uncertainty that will continue for 12-24 months," said Kumar Parakala, chief operating officer for advisory services at the Indian arm of consultancy firm KMPG. "They need to be prepared for smaller deal sizes and they will never have long-term commitment from enthusiastic buyers. It is going to be a different ball game."
According to ISG, outsourcing activity sagged in the first three months of 2013, when total value of technology contracts outsourced fell by about 30%, both sequentially and from a year ago. On Friday, when Wipro, India's thirdlargest software exporter, reported stagnant sales and issued a bleak outlook with possibility of sales shrinking in the June quarter, global technology bellwether IBM missed earnings estimates for the first time in eight years. Shares of IBM, which weathered the 2008-09 financial crisis without missing a beat, tanked 8% on the New York Stock Exchange. Three weeks ago, Accenture said it expects sales to grow at below the mid point of its 5-8% guidance for the year to August 31. The software services and consulting company blamed lower-than-expected discretionary spend by corporations, especially in Europe.
Nearly a month ago, in mid-March, enterprise software maker Oracle reported worse-than-expected results, sending its shares sliding 7% on the Nasdaq. "With such divergence in growth rates at top firms, IT sector growth expectations have clearly come down," said Harit Shah of Nirmal Bang Institutional Equities "We might see a small uptick in technology spending, but the general consensus is that markets such the US are going to remain the same, especially after earnings from Oracle and Accenture, which said discretionary spending is negative."
The top four Indian IT companies — TCS, Infosys, Wipro and HCL Technologies — said that discretionary spend remains muted. Even for TCS, which reported sequential growth of 3.1% and backed it up with bullish management commentary, growth was muted in the United States, its largest market. TCS' sales growth got a major push from its India business.
"TCS' growth in developed markets was only marginally better than that of Infosys and behind HCL Technologies, which came as a surprise to us," wrote Ashwin Mehta and Pinku Pappan of Nomura Financial Advisory and Securities in a post-earnings note to clients. "TCS' commentary, on the other hand, continues to be positive, with management reiterating its expectation that revenue growth in FY14 would be better than FY13." Significantly, revenue from new software licences declined 2.6% from the previous quarter, against a guidance of 3-13% growth. Sale of software licences are typically considered an early demand indicator for the Indian IT services sector, which gets business related to customising and implementing the new software.
Industry body Nasscom has projected 2013-14 growth of 12-14% for the Indian IT sector, which expanded just about 10% in the last fiscal. Nasscom president Som Mittal did not reply to calls and text messages. While the pace and nature of recovery that awaits Indian IT sector is not clear yet, industry experts said what is certain is that Indian IT companies will have to get used to the uncertainty and learn to survive in the new normal.
"Indian IT sector need to embrace the uncertainty that will continue for 12-24 months," said Kumar Parakala, chief operating officer for advisory services at the Indian arm of consultancy firm KMPG. "They need to be prepared for smaller deal sizes and they will never have long-term commitment from enthusiastic buyers. It is going to be a different ball game."
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