Indian IT Sector Sees No Improvement

The IT sector, which has been facing a roadblock because of reduced demand from geographies like the U.S. and Europe and from industries like banking, financial services and insurance, is not witnessing any improvement in the situation.

Following the news of the delayed hiring of 28,000 new recruits to mid-2013 from September this year by Infosys, California-based iGate has announced that it will delay the joining dates of about 1,000 - a third of the new recruits - by a quarter or two. The Indian head count for the firm stands at approximately 30,000 and this firm too, like others in the flock, has been affected by macro factors. A good estimate of the disturbance faced by these IT firms comes from high benching rates, no salary hikes and delayed employment, apart from the guidance estimates.

Over the last two quarters, we have seen a below par estimate of guidance from IT majors like Infosys and Wipro. While a depreciating rupee benefits these firms in terms of revenue realisation, since about 80 per cent of the revenues are sourced from the U.S. and Europe, the falling currency takes a toll on the guidance figures. Thus, even if the revenues posted are high, fundamentally the demand remains sluggish.

The new trend emerging in the sector though lies in the performance of mid-sized IT firms, which has been superior as compared to the biggies of the industry on account of disintegration of large deals into smaller ones. This factor gives way to smaller companies matching deals with the supply and this, combined with a smaller base, leads them to post higher revenue growth.

YTD, Infosys’ share prices have gone down by about 11.11 per cent while Wipro has declined by 2.07 per cent. Of the big four of IT, TCS and Cognizant have been doing relatively better. Coming to the mid-sized IT stocks, Hexaware, KPIT Cummins, Mindtree and NIIT have all yielded returns ranging from 55 per cent to 70 per cent over the same period.

Moreover, there is an increasing anti-offshoring sentiment floating in the U.S. because of low job rates and with a focus on driving growth. A recent media report suggested that two U.S. government deals launched recently were focused on the onshore model with a mandatory clause of no offshoring. The impact of this model on the Indian IT sector is not expected to be significant due to the limited exposure of Indian IT firms to government deals.

Whatever the case may be, as we mentioned earlier, a customer-driven approach and concentration of companies on emerging markets to reduce heavy dependence on the U.S. and Europe, coupled with better global economic conditions, would lead to another boom in the sector. The picture may be blurred in the short term, but the essence of the story lies in the long run.

YTD Returns on IT stocks