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IT cos struggle, reminiscent of 2008 slowdown


12 Jan 2012
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IT cos struggle, reminiscent of 2008 slowdown

The report cards of large IT firms are in, and they paint a grim picture of the year ahead that is reminiscent of the 2008 crisis, making analysts doubt even the modest growth forecast by industry body Nasscom.

Cognizant Technology Solutions, the outsourcing services provider that was growing at breakneck speed and was beginning to be seen as invincible, is beating the retreat in the face of a tough demand environment. Last Monday, Cognizant revised its growth expectation from 23% to 20%, and in the process lost nearly a fifth of its market value.

Analysts at Kotak Institutional Equities think Nasscom's growth target "may be a tad aggressive". Kawaljeet Saluja, Rohit Chordia and Shyam M wrote in their report last week that slowdown in technology spending by banking & financial services firms coupled with an anaemic spending by telecom companies pose significant risk for Indian IT services firms as these two sectors together contribute about 40% of revenues.

The latest set of earnings numbers from large IT firms also throws up some interesting pointers, reminiscent of the 2008-09 fiscal, when corporations in the US and Europe froze technology spending due to the global financial crisis, which was just starting.

The top four IT firms together grew revenues by a mere 1.2% - the slowest since the fourth quarter of 2009 fiscal. Pricing, or per-hour rates charged by IT firms, declined 1.2% - the sharpest quarterly sequential decline since the last quarter of 2009 fiscal.

Analysts are beginning to draw parallels with the 2008 crisis, from which the global economies still haven't fully recovered. "Cognizant reset its guidance from 23% to 20%, but why did the stock fall 20%? The reason is nobody believes the reset is the real reset," Moshe Katri, managing director at securities research firm Cowen & Co told ET.

"This is beginning to look similar to 2008. Initially, it was budget delays, then things got worse and it got a lot worse after that," Katri added.

After growing at around 16% in 2011-12, India's second-largest software exporter Infosys expects to grow by only 8-10% in the year to March 2013.

This is much lower than the 11-14% growth forecast by the National Association of Software & Services Companies (Nasscom).

Mumbai-based brokerage Motilal Oswal said the guidance by large IT firms challenges Nasscom's growth expectations in the year ahead.

"While TCS will grow above the industry, we doubt if the industry growth number will still be 11-14%, going by the developments during the quarter," analyst Ashish Chopra of Motilal Oswal wrote in his latest report on the IT sector. "We would not be surprised if Nasscom's estimates for fiscal 2013 are revised downwards."

Nasscom has maintained that it expects to revisit the forecast only in October, as it said while coming out with the initial forecast earlier this year.

"For this year, we are sticking to the forecast of 11-14%. October will be the time that we will come up for a review," said N Chandrasekaran, the new chairperson of Nasscom, two weeks ago, at the time of taking over. "It's not prudent to change the forecast based on a quarter's performance of IT companies."

-Times Of India
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