BAD Times of IT companies

IT companies are about to show the negative results this quarter. The U.S. accounts for 58% of the market and the UK another 19%. The growth for Indian IT companies has come from the US and Europe which grew at a CAGR of 29% and 46% respectively from FY04-08. But with the US and Europe in the grip of recession, we see the earnings growth for the Indian IT companies at risk.”The growth in revenues is expected to decline in the quarter due to cancellation of projects. The Indian IT industries are facing the biggest turmoil. The major market players for IT industry are US and UK and these global economies are into recession. The revenue generation for IT companies is in terms of Dollars, but the benefit of depreciating rupee will get squashed off due to decline in top line of the company. The US Dollar appreciated by 1.3-15.2%on average against pound sterling euro and Australian dollar. This will give negative impact as revenue generation from this segment is about 30%. Unless and until this global economy are out of the recession and they spend on the IT infra and services, the future don’t seem to be gloomy. GDP of US and UK contributes about 85% of revenue of big IT companies, and expectations are that they will not grow. BFSI, Telecom, and Retail contributes about 65% of revenue for the top 4 IT companies, and they are suffering the down growth ie decline in the growth due to loosing of confidence from customers, the M&A have reduced, there had been bankruptcies. Also the Fraud by Satyam led the IT firms towards the down trend. Due to cancellations and lack of consumer confidence now the unemployment is arising in this sector. The companies don’t have good projects left with them, which shows the sluggishness in the top line growth.

The rupee has depreciated 4.69 per cent against the US dollar during the March quarter, while on an year-on-year basis it has depreciated over 27 per cent. During the January-March period, Infosys scrip has gained 15.38 per cent to Rs 1,324.10 and TCS was up 9 per cent. While shares of Wipro fell one per cent since January 1, HCL Technologies was up 17 per cent at the end of March 31.

Growth By 2009:

The IT firms will show the growth of 13.4% slowest since 2003. Growth Phase 1.0 (2003-08), during which the domestic market witnessed unprecedented growth, nearly tripling the market size from Rs 34,000 crore in 2003 to Rs 1,01,031 crore in 2008, a CAGR of over 24 per cent. The economic meltdown forces enterprises to slash their IT budgets across industry verticals, the telecommunications sector, would continue to grow at higher than average growth rate and will be the least impacted by slowdown. Global growth will be cut in half and take three years to come back. Taking into account a dramatic slowdown of global GDP global IT spending will decrease to 2.6 per cent in 2009 – half of 2008’s five per cent and far below 2007’s seven per cent growth rate.

The growth in IT can be expected by 2010. Rajasthan government-run power companies have appointed IT major Infosys as consultant for implementing centre-funded Restructured Accelerated. Under this project they will get a good fee of 1.8 CR as consultation fee for four years. Under the programme, the IT consultant would have to handhold and guide the power utilities.

Besides, HCL Technologies is likely to report a revenue growth on the back of acquisition of British consultancy firm Axon, which would cast its toll on the operating profit margin of HCL.