AS COMPANIES in the $60-billion technology services sector gear up to announce results for the first quarter of the 2009-10 fiscal, the straws in the wind suggest that they may have weathered the worst of the global economic downturn.
    The biggest straw in the wind is the return of deal flows, albeit in smaller sizes of about $25-30 million. This is a welcome development considering that in the past couple of quarters, clients had battened down the hatches by suspending discretionary spending, freezing IT budgets and putting offshoring decisions on hold.
    Many of the new deals involve what is referred to as Business Transformation Outsourcing, where an Indian vendor would work with a client to reshape entire processes such as payroll or HR administration to make them more efficient and achieve cost savings.
    In May, India’s largest software exporter, TCS, signed a five-year deal with Volkswagen Group in the UK to provide IT support and transformation of its infotech infrastructure. TCS also bagged a contract from ABB in the UK to implement business software. Wipro, the largest IT services exporter, signed a $34-million contract to extend a deal with Sunoco, a US-based marketer of petrochemical products. Sales may not exceed 15%
IT SECTOR analysts believe sales growth during the April-June quarter will not exceed 15% but agree the software services industry could be looking up. The first big result for the IT sector begins with India’s second biggest software exporter Infosys Technologies on July 10.
    Infosys has forecast a decline of 6.5-8.2% in its dollar revenues and a 11-13% increase in rupee terms for quarter ending June 30, 2009.
    Research and advisory firm Booz & Co as well as investment bank Avendus Advisors see sales growing by 10-15% for the top six IT companies. Suvojoy Sengupta, a partner at Booz & Co, expects operating margins at over 20%.
    However, Gartner, an IT-focussed research company, predicts single-digit sales growth quarteron-quarter for the sector. While the Q1 results may only be marginally better than in the previous couple of quarters, the outlook looks more promising. Says Partha Iyengar, vice-president and senior analyst at Gartner: “We have started getting calls from clients (in the US or Europe) on how to cut costs by offshoring. These are positive signs. We have already hit the bottom. But we might see a recovery only by late 2009.”
    Software industry grouping Nasscom has said that it expects ‘single-digit’ export growth during the 2009-10 fiscal. Some analysts are advising investors to stay away from the IT sector in the short term.
    “I don’t see a recovery any time in the next two quarters. Infosys, however has a habit of giving conservative guidance and may spring a positive surprise,” says Dhirendra Kumar, CEO, Value Research Online, a mutual fund watcher.
    Harit Shah, IT analyst at Angel Broking, agrees that a wait of at least two quarters is warranted before a revised outlook is pronounced.
    “In the short term we might see single-digit sales growth for top tier IT majors. Year-on-year, we might see a flattish sales growth. However, in dollar terms we might see a dip for some IT companies,” he said.
    Operationally, the manpowerintensive sector, which employs about 2.3 million, continues with its freeze on recruitment. Selective hiring is, however, on for those with specialist skills in areas such as enterprise resource planning business software and IT architecture development, but the numbers are negligible. There is also greater focus on shifting employees and work from client locations onsite to offshore destinations such as India.
    Among the positive signs for the industry is that the domestic market looks attractive despite lower margins compared to the exports. Also, with former Infosys co-chair Nandan Nilekani now part of the government to oversee the Unique Identification Card project, domestic IT spends could get accelerated.
    “Clients feel that the worst is behind them. Especially in the US, many customers took aggressive measures to cut costs and renegotiate contracts,” says S Gopalakrishnan, CEO of Infosys.
    Infosys Australia recently won an IT application development and maintenance contract worth AUD 450 million (Rs 1,800 crore) from Telstra, a large Australian telecom company.
    Buoyed by the hope of recovery, IT companies are now going all out to spend more to win new contracts and increasing their sales force.
    However, challenges persist. As KS Ananthanarayan, CFO, Birlasoft, points out, the biggest challenge now is getting new business. “Companies are investing a great deal in salespeople and there is an increased focus on incumbency of clients,” he says. Infosys for instance added 217 employees to its sales and marketing team in FY09, its highest ever since the company was founded in 1981, according to Edelweiss Research.
    Similarly, Wipro, HCL, TCS and Birlasoft have augmented their sales teams. But this strategy needs to be improved with a focus on business rather than technology. Source: ET, 1 Jul '09