* Incremental pricing may weaken, and be renegotiated downwards
* Contracts are taking longer to be awarded; start dates are getting deferred
* No significant deal may be signed in the BFSI space for at least a year
* Consolidation and mergers of banks could lead to reduced IT spends
* Benefits from fall in rupee get limited by over-hedging
* Offshoring to India may face backlash as firms issue pink slips to US employees
The unprecedented banking and financial crisis in the US will continue to tell on the revenues and profitability of Indian IT-BPO firms for at least a year. Some analysts, in fact, opine that software body Nasscom may -- for the first time -- miss its revenue (software exports) target of $60 billion by FY09-10, even as the long-term IT story remains intact.
The short- and mid-term bearish sentiment stems from the fact that the US and UK account for almost 80 per cent of the revenues of all Indian IT firms. The crisis is spilling over to the UK, too, where Indian IT firms were finding succour by derisking geographically. Moreover, the banking, financial services and insurance (BFSI) vertical -- which has been affected the most by the sub-prime crisis -- accounts for slightly over 40 per cent of the total revenues of the Indian software sector. Pain in BFSI segment results in re-negotiation of pricing, and further lag in deal-making.
Avinash Vashistha, chairman and CEO, Tholons, asserts that the Nasscom revenue target of $60 billion by FY10 "seems to be difficult target to achieve". The target of $40 billion for FY08 too "appears challenging", he adds. "We do see ramp ups to begin from Q2FY09, but for the Indian IT firms to manage to get growth rates above 25 per cent will be difficult. In case of BPOs, the next quarter might see some announcements in terms of change in the guidance," he asserts.
Som Mittal, President Nasscom, admits that "the incidents in the last few days are quite serious and will have an impact on the Indian IT industry", but adds that it's difficult to quantify the exact impact at this point of time. "The current scenarios impact will be far more than just being company-specific or client-specific. While the BFSI has been impacted and new projects have been on hold, there are other business verticals and they are doing well. On the other hand, the rupee had crossed the Rs 45 mark which will give IT firms much needed relief on the margins.”
However, Edelweiss analysts note that the negative segment has hurt other emerging verticals like retail (which accounts for around 8 per cent revenues) spending too, and manufacturing (around 15 per cent) which is being affected in pockets (for instance, automobiles). Besides, the benefits of a falling rupee too would be largely limited since most companies had over-hedged their position (most of it as forward contracts).
Sudin Apte, Sr Analyst, Forrester Research, says "given the Indian IT industry’s export was heavily dependent on North American banking and financial services companies, the current economic fallout and bankruptcy of several top offshore clients – be outsourcing or captive centers – is inevitable. Forrester believes it will surely have impact on growth of the industry and meeting prior announced growth goals will be surely tough."
As the IT Industry is shaped by global economic forces, the Indian software and BPO industry will turn into a cyclical growth industry. Forecasting the growth trajectory in this context will become all the more fraught with risk in the future, concurs Alok Shende, Principal Analyst, Accendia Consulting. S Sabyasachi, Senior Director, neoIT, too, admits that the growth for the immediate year and the next few years will be slow. "Nasscom's prediction of $60 billion could be on an aggressive side. But the IT story is intact. Having said this, the outsourcing story continues and we see recovery from mid FY09 and will go on till end of the fiscal."
There are dissenting views though. For instance, Partha Iyengar, vice president of IT research firm Gartner says "Nasscom's predictions are still very doable. This is a somewhat cautious phase with banks have a wait-and-watch attitude. After the US elections, though, the situation will stabilise and IT firms will have a chance to recoup losses and accelerate the growth rate."
However, Monish Chatrath, National Markets Leader, Grant Thorton, notes that offshoring may not happen in a hurry since banks and financial institutions will be laying-off employees, and offshoring to India will have a political backlash in an election year. According to Tholons, banks remain in a wait-and-see mode, they've become extremely risk-averse and are likely to defer many project starts until 2009.
