IT MAY SEE BIG REVENUE SLUMP IN FY10: DELOITTE

The Indian IT software and services industry which has seen a compounded annual growth rate (CAGR) of around 30 percent over the last three to four years is now projected to grow at 20 percent, says a study by Deloitte on the impact of the economic slowdown on the Indian IT industry.

The Indian IT sector derives approximately 61 percent revenues from US-based clients, while the revenue contribution from US clients to the top five Indian IT companies (who account for 46 percent of the IT industry revenues) is approximately 58 percent.

An interview with Shanto Ghosh, principal economist, Deloitte India.

What will be the impact of the recession on the Indian IT sector?

The impact of the slowdown in the US is likely to have a deep impact on the prospects of the Indian IT sector. Moreover, about 41 percent of the IT industry revenues in India are estimated to be from financial services. Since this sector has been affected most severely in the current climate, the impact on Indian companies catering to this sector has been (and will continue to be) more acute. The margins are prone to be challenged on account of the slowing growth in the US and European banking and financial services industry (BFSI) sectors.

What is the overall forecast for the year 2009-2010?

It is only now this year that we will see the impact of contract renegotiations coming in the next few quarters and companies are facing huge margin pressures. The revenues that we are seeing in the IT sector are from the contracts signed in 2007-2008, and hence does not mean that the Indian IT sector is resilient. The IT industry revenue in 2009-2010 will slow down substantially, it will be in the range of 12-15 percent, profitability will shrink with 1-2 percent decline, employment growth will slowdown. We will see restructuring of IT sector and new services in newer geographies, such as Asia Pacific, Africa and Latin America. The fundamentals of our IT players are very strong, and I see them surviving them this slowdown with grace.

I don?t see lot of mergers and acquisitions happening in next one to two years. There is been change in higher volumes and lower prices in the IT contracts and that trend is going to continue for one to two years. The revival will start in second calendar quarter of 2010 (April to June). By the end of 2010, the world economy would have substantially revived itself.

What will be the impact of the Obama tax plan coming in?

Global MNC or captives have fared well compared to the pure Indian IT companies, but now the Obama plan coming in, there is going to be direct impact on the extent of the work coming to India, even for the captives.

What will be the impact on the funding that companies had borrowed from domestic and foreign sources to fund their ambitious expansions such as acquisitions and diversification?

Lots of IT companies are cash rich, there won?t be any problem for them to finance their debt obligations. I do see a problem in them raising funds, because in India traditionally corporates have gone abroad to borrow funds and that is going to get hit.

Domestic debt market is 90 percent public, the rest is corporate. Companies will now try to go to the local domestic market for source of funding and this is not the best time, because they are not going to get attractive valuations, however cost of borrowing has gone down substantially.

Do you think there will be massive lay-offs in India?

We are not going to see massive unemployment, I don?t see increase in unemployment in the IT sector, but I see a slowdown in the growth rate of employment. I don?t see layoffs as reaction to this recession. However salaries are being stagnated, work days are increased or people are asked to take two month mandatory leave.

What kind of strategy is being adopted by the exporters to get the government support?

The government had given lot of benefits such as tax incentives to IT and ITES sector and those are scheduled to expire in March 2010. The government will extend these benefits in the light of the economic recession, particularly incentives given to exporters.

The export market which consists of 40-45 percent 40-45 percent has dried up. Our dependence on the US has unfortunately worked against us in this situation. Purely what we are experiencing in banking and financial services sector, IT revenues excluding hardware will be impacted by $ 1 billion, just because of the slowdown. IT Spending will be compensated by the healthcare, Telecom and retail sector.

 

Source: The Economic Times