Indian technology majors brace for a stormy 2012

Moumita Bakshi Chatterjee Updated - December 28, 2011 at 09:42 PM.

Tough time ahead: With no official fix in sight for Europe and the US now headed for Presidential elections, the weak running of IT service providers is likely to continue next year.

In the Indian IT circles, 2011 will be remembered for its shaky global economy and uncertainties that forced a re-think on business plans. It will also be remembered as a year of top deck recast in large companies such as Wipro and Infosys.

M&A deals

A year of blockbuster M&A deals such as iGate-Patni, Genpact-Headstrong and Serco-Intelenet that lit up an otherwise gloomy tech landscape. A year when the most storied Indian tech vendors disappointed investors with below par performance. A year when old pecking orders were shunned and the market picked new favourites.

But, most of all, it was a year that set the tone for a stormy season ahead.

“We recently surveyed 300 companies and found that only 40 per cent of them intend to keep 2012 IT budgets flat…One in every five company intends to reduce their budgets by 5-7 per cent,” says Mr Sudin Apte, Chief Executive Officer of advisory firm Offshore Insights.

Industry watchers, across the board, concede that the coming year will continue to be difficult for tech service vendors, as deteriorating macro-environment casts a cloud on decision-making cycles and business volumes.

“Between this year and the next, it is definitely 2012 which is more challenging. If the global macro-economic environment does not improve, everything goes for a toss,” says Mr Sanjeev Hota, Associate Vice-President - Institutional Equities at Sharekhan.

cacophony of events

Mr Rajiv Sodhi, Senior Corporate Vice-President at HCL Technologies, says while economic challenge was the single biggest issue in 2008, the year 2011 was a cacophony of events.

“Not only were there economic challenges to deal with but also politically charged scenarios globally. It was a year of change also in the technological context as cloud computing, mobility, and social media gathered momentum,” says Mr Sodhi.

Although 2011 started off on a somewhat optimistic note, the global uncertainties - underpinned by the European debt crisis and a sluggish US economy – threw up new posers for IT vendors in the second half.

With no official fix in sight for Europe and the US now headed for Presidential elections, the weak running of IT service providers is likely to continue next year, say industry watchers.

“Going forward, if the macro-economic situation does not improve, there will be a larger impact on volume growth,” says Mr Hota.

New US Bill

Last week, the Indian offshore industry was confronted by a new US Bill that proposes to make American companies – those moving call centre jobs overseas – ineligible for Federal loans or grants for five years. Further, it proposes stringent disclosure norms for calls that are routed to offshore locations such as India and the Philippines.

Industry veterans, for now, are playing down the implications of the Bill but admit that more such legislations could be introduced in the US Congress in the run-up to the elections.

Single digit growth

Offshore Insights' Mr Apte believes that IT service exports may record single digit growth in 2012-13. As it is, slowdown in client decision-making and delay in ramp-ups are becoming visible each passing day.

Infosys recently indicated that it expected the third quarter revenue growth closer to the lower end of the guidance, as clients delay decisions on large contracts.

“In our interaction with the top four IT companies, we found that except Infosys, the other three anticipated flat-to-marginally positive IT budgets,” says Mr Hota.

But, in the same breath, he warned that in case the macro-environment does not pick up, global customers may choose to keep their spending decisions on hold even after they finalise technology budgets for 2012.

New opportunities

On a positive note, HCL's Mr Sodhi says that while there may be no net growth in the market for technology services, significant opportunities will emerge from vendor churns and contract renewals. First-time outsourcers in Europe – those keen on tightening the screws on costs – will throw up new opportunities for service providers, feels the industry.

“It is not as if all players will be able to leverage the opportunities equally. Much will depend on just how dynamic or nimble-footed IT vendors are in tuning their strategies to the changing needs of global customers. As it is, we have been seeing huge variations in the performance of IT companies over the last few quarters,” says Mr Sodhi.

In fact, HCL has been maintaining that it is quite excited about the deal pipeline build-up during October to December period.

It has been citing sourcing advisor TPI estimates that $8 billion worth of deals will be restructured in the December quarter.

“Much of that will depend on a companies' preparedness to eat someone else's lunch,” Mr Sodhi sums up.

moumita@thehindu.co.in

Published on December 28, 2011 15:47