US ratings downgrade: IT sector could face difficult times

The Indian IT sector could be in for difficult times as the US accounts for almost 60% of the sector's revenues, and Europe another 20%.

With the US and European economies looking fragile, the Indian IT sector could be in for difficult times. The US accounts for almost 60% of the sector's revenues, and Europe another 20%.

Though the present problem with the US economy is around sovereign debt concerns, the worry is that going ahead this will affect US private sector growth, and therefore their IT spends.

Siddharth Pai, MD of global sourcing advisory services firm TPI India, said that if the US government cuts public spending to control its deficit, then private sector growth could be impacted. This is because public spending cuts could lead to lower investments and job creation, thus slowing down overall private sector growth.

IT stocks have been amongst the worst hit since the US ratings downgrade. The BSE IT index on Monday fell 4.33% to 5,222 points. That was on top of the 5% decline on Friday. In the last one week, the index has dropped over 11%.

"IT companies are export oriented and are hugely dependent on the US markets. Therefore negative news emerging from that region can lead to fall in stock prices," said Srishti Anand, IT analyst at Angel Broking.

Analysts also say that emerging markets like India would not make up for the loss of revenues that would emerge in case of a situation where clients in the West were to cut IT spends. Apart from being a smaller sized market, the Indian market also offers lower margins.

In the 2007-09 global financial crisis, the Indian IT sector was severely impacted. While revenue growth rates for top tier companies like TCS and Infosys fell to single digits, gross hiring numbers were also hit. Mid-tier IT companies were impacted to a greater extent as clients preferred to work with larger and more trusted names.

Sameer Dhanrajani, country head, Fidelity National Financial, said that BPOs were the worst hit in the previous recession as unlike technology investments which require concerted efforts and are long term in nature, BPO processes can be sized down faster and more easily.

Hari Rajagopalachari, ED for consulting at PricewaterhouseCoopers, expects shorter-term pains for the IT sector if decision making on IT spends slows down following economic turbulence. From a longer-term perspective, there could be more pain if US companies become more protectionist. Otherwise there could be positives, as clients would look to improve cost efficiencies and profit management through greater levels of offshoring.

Glen Serrao, manager, Zinnov Management Consulting, said that another immediate concern is that of currency appreciation. "The RBI has managed to keep the Indian rupee at Rs 44-45 to the dollar. But if this was to fall to Rs 39 as we saw in the previous recession the profitability of IT companies could be hit," he said.

IT companies say there have been no immediate calls from clients to re-negotiate contracts or any sign of IT budgets being cut. T K Kurien, CEO of Wipro's IT business, said that it is too early to make an assessment. But he said the industry is far more prepared for any change in the macroeconomic environment now than it was in 2008.

Industry body Nasscom also issued a statement saying that though the global economic environment is a cause for concern, "it is not likely to impact the Indian IT industry, in the near-term future."

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