INDIAN IT SECTOR WORST IS OVER OR YET TO COME

Many of the ramp-ups we were expecting did not happen....we had sudden ramp downs SD Shibulal, CEO and MD Infosys

The growth in the service sector in India has been led by the ITITES sector, contributing substantially to increase in GDP, employment, and exports. The sector has increased its contribution to India's GDP from 1.2% in FY1998 to 7.1% in FY2011. According to NASSCOM, the ITBPO sector in India aggregated revenues of US$88.1 billion in FY2011, where export and domestic revenue stood at US$59 billion and US$29 billion respectively. The top seven cities that account for about 90% of this sectors export are Bangalore, Chennai, Hyderabad, Mumbai, Pune, Delhi, Kolkata, Coimbatore and Kochi. Export dominate the ITITES industry, and constitute about 77% of the total industry revenue. Though the ITITES sector is export driven, the domestic market is also significant with a robust revenue growth. The industrys share of total Indian exports (merchandise plus services) increased from less than 4% in FY1998 to about 25% in FY2012. India's growing stature in the Information Age enabled it to form close ties with both the United States of America and the European Union. However, the recent global financial crisis has deeply impacted the Indian IT companies as well as global companies. As a result hiring has dropped sharply, and employees are looking at different sectors like the financial service, telecommunications, and manufacturing industries. Moreover the sector continues to face challenges of competitiveness in the globalized world, particularly from countries like China and Philippines. The financial results declared by most of the Indian IT companies were quite disappointing. Revenue growth for Wipros IT services was lowest among peers and its guidance for the first quarter of FY13 was disappointing. Infosys missed its last quarter guidance for FY12; moreover the companys revenue guidance of 8-10% for FY13 is much lower than Nasscoms projection of 11-14% growth. Although TCS and HCL Technologies gave satisfactory results TCS became the first Indian IT company to cross the $10 billion revenue mark. HCL Technologies client addition was robust with 14 new deals worth $1.5 billion in the March quarter. HCL has 4 clients with over $100 million billing compared with just one a year ago. Companies are blaming this slowdown on patchy domestic revenues, unexpected slack decision-making and ram-down by clients. India exports software and services to nearly 95 countries around the world. The share of North America (U.S. & Canada) in Indias software exports is about 61 per cent. In 2010-11 Wipro derived approximately 55% of IT services revenue from United States and 27% of IT services revenues from Europe. For Infosys North America contributed 64.2% of our revenue, up from 63.7% last quarter, while revenues from Europe declined slightly to 21.3% compared to 22.1% in the previous quarter. India and the rest of the world contributed 2.6% and 11.9% revenues respectively.

United States, which is one of the major markets for Indian IT sector, is not growing as per expectation. Federal Reserve officials expect the growth to stay moderate. Europe another key market for Indian IT sector is still in throes of crippling recession. As recent data revealed, the UK has slipped back into recession. Britain slipped back into recession with its GDP shrinking for the second quarter. Britains economy shrank by 0.2% in the 1st Quarter of 2012, following a 0.3% drop in previous quarter. TCS and Wipro have indicated that the clients slowed down decision making on deals in the last quarter of 2011-12. Industry watcher believe that given the uncertain economic environment in large markets, like Europe and US, decision making is likely to be slow. Indian IT sector is also facing increased competition. According to analysts there are three reasons for this increasing competition. One, pricing alone does not differentiate the provider any more. Nearly all global majors including IBM, Accenture and Cap Gemini have established or are establishing their footprints in India. Two, cost savings is just one of the many expectations that the customers have from service providers. Finally, increasing competition is not just from the likes of IBM and Accenture but also from a new breed of ambitious service providers in Latin America who are tapping US & Europe markets and the likes of Google, Amazon and Sales force which are offering services like Software as a service (Saas) or Platform as a service (Paas) . Google drive a new cloud based service provides 5GB of free space while paid plan provides 25GB at just Rs 130 per month. Competition is also increasing due to the fact that the deal size and tenures have shrunk. Few years ago, $100 million deals were in play. Now deals are more in $25-50 million range. Moreover even smaller deals are being fought out by not just tier II companies but the large MNCs which have a presence in India. The tenure of outsourcing contracts is also coming down. The contracts which were 8-10 years in tenure are now being renegotiated to 3-5 years long contracts. Clients are demanding new pricing models, a presence across geographies and greater sharing of risk from Indian vendors. The industry has also had to deal with skyrocketing real estate and infrastructure costs in Tier-1 cities. Due to these escalating costs, many pundits argue that the trajectory of 30% annual growth is unsustainable going forward; As a result, many Indian BPOs in Tier-1 cities have been looking at migrating operations to Tier-2 and Tier-3 cities. Indian BPOs competitive edge is being further eroded as wages rise by 10-15% p.a. as a result of skill shortage. The attrition rate is as high as 60% and because of this, the cost of training goes up. On an average, the cost as the cost of training is about Rs. 40000 to Rs. 60000 per agent.

Getting a work visa has become far more expensive and tougher as rejection rates have increased dramatically. Infosys is being investigated for alleged visa fraud. TCS is facing a class-action law suit in the US for allegedly keeping US tax refunds of Indian employees working abroad. As the US presidential election looms closer Indian IT companies can brace for some heat on job losses related to off-shoring. The year 2012 started a bit like 2009 with budget delays as a result of which companies struggled to get visibility. The recent announcement by government on giving preference to domestically manufactured electronic goods in procurement by all government departments. Off late, Indian consumers have been able to enjoy the benefits of new technology and services. If preferred manufacturing becomes a norm, the time lag will reverse and widen. This will over time have negative impact on software industry. Moreover units in software exporting zone are now being subject to Minimum Alternate Tax (MAT), which were previously tax free. There is divergence in the government itself. While Industry ministry wants to encourage IT companies the finance ministry is seeking to increase the tax revenue from the sector by restricting the deduction claimed U/s 10A of Income tax Act, which relates to tax exemption for software export income by units registered with Software Technology Parks of India. Most analyst expect that growth momentum for the sector will pick up later this year but its not going to be anywhere close to the robust growth the industry witnessed before September 2008. Lets just hope for the best.