US revenue for Indian IT holding up

But firms fear downside if US slowdown lasts.

Indian IT services companies, which are predominantly dependent on the US for their business, fear a significant loss of revenue if the economic slowdown persists for a long time in the world's largest economy.

IT majors like Wipro and Infosys do not anticipate any immediate slowdown in revenues but there is a general perception in the industry that the time has come for them to explore new markets. This thought is stronger among the mid-tier IT services firms.

Bangalore-based mid-tier IT and R&D services company MindTree Consulting foresees a 50:50 chance of US economy slowing down. The Rs 590 crore company, which earns 64 per cent of its revenue from the US, has adopted a 'wait and watch' policy.

"If there is a slowdown for a short term, offshoring will gain for the first 4-6 quarters since more companies will outsource work to cut down costs. For the slowdown to impact the Indian offshoring industry, it could take at least three years. The growth momentum will stagnate but companies will continue to get their share of revenues from the US market," MindTree Consulting CFO Rostow Ravanan pointed out.

According to him, Indian companies are already focusing on non-US markets anticipating an economic slowdown. Another factor that is encouraging the Indian IT companies to look at non-US markets is the economic growth in Australia and Japan.

"Only a few Indian companies are completely dependent on the US for revenue. The US alone is not driving economic growth worldwide. Many companies are already deriving a significant share of revenue from non-US markets. This trend will grow if there are signs of long-term slowdown," he noted.

Quoting a survey, Ravanan said 40 per cent of the revenue and profits for many US companies came from outside the US. "They have become globalised. There are opportunities for growth in countries like India. Consequently, Indian IT companies have opportunities for growth even if a US recession sets in."

Another IT services firm, iGate Global Solutions, which derives a significant proportion of its revenue from the US, feels that technology investments will remain flat to marginally higher in 2008.

"I believe that with the negative sentiment in the economy (as opposed to actual recession), companies are becoming more prudent and are focusing more on costs and efficiency improvements. Technology investments will remain flat to marginally higher in 2008 as organisations attempt to reduce operations costs more dramatically by investing in technology initiatives. Also, offshoring continues to be strong as organisations seek to cut costs and move both technology and operations work to India," said iGate CEO Phaneesh Murthy.

He pointed out that the housing bubble has burst largely in non-prime areas in the US. "In prime, the loans are holding up. Meanwhile, history indicates that once one sector goes down, others follow, this has not yet been the case here. Also, consumer spending continues to be at a reasonable rate and retailers are already off to a good start for the Christmas shopping season. So I am more optimistic on the overall economy. Having said that, we need to tighten our belts, start working more efficiently, increase productivity and learn to deliver better margins in the new tighter scenario," he contended.

Infosys, India's second largest software exporter, which receives 62.6 per cent of its revenue from North America, says it is too early to comment.

During the second quarter results analyst call, Infosys CEO S Gopalakrishnan had said: "It is based on our understanding of the market (US) that we are not seeing any slowdown. We have indicated that very clearly and neither have we factored it in any large deals."

Wipro too contended that there doesn't seem to be a slowdown in the order inflow or revenue rates of Indian service companies.

"We as a company have not experienced any slowdown taking place. It is difficult to predict, and I think we will get a clearer picture in 2008, but my personal judgment is that you will see no slowdown taking place in the US into the next year either, it is a personal judgment which I have," Wipro Chairman Azim Premji had told reporters during the second quarter results announcement.