US slowdown to hit top Indian IT cos

The slowdown in the US economy along with domestic factors like service tax on leased and rented premises and imposition of minimum alternate tax may impact revenues and earning growth rates of all major IT companies of India, including Infosys, Satyam, TCS and Wipro.

A report by HSBC Securities along with Capital Markets (India) estimates that revenue and net profit growth rates for eight IT majors will decline in the range of 500-1,500 basis points in 2007-08 since the US remains the largest market for Indian IT services companies, accounting for 60-70 per cent of exports.

In the year 2006, technology/IT spending was only 11 per cent higher than in 2000, with contribution from computer and software services increasing to 40 per cent in 2006 from 36 per cent in 2000 (implying lower volatility).

The share of hardware and communications declined, reducing contribution from volatile sectors. The report also maintains that offshore vendors are growing at a considerably faster pace than their global peers and are gaining market share from incumbents.

The report said service tax is the next dampener. An Emkay Research states the 12.5 per cent service tax on leased and rented premises could have a negative impact of 50-100 basis points on the IT majors.

The impact of MAT on earnings of IT companies could range from 1-6 per cent, taking into account a company's exposure to offshore revenues, which account for 40-70 per cent of the total revenues.

As for fringe benefit tax on employee stock options, analysts said the impact would not come into effect until April 2008. Besides, the fine print on the tax accounting impact is awaited.

Meanwhile, a Dun & Bradstreet study predicts wage inflation of 10-20 per cent. Managing employee costs (Indian IT firms spend 35-45 per cent of their revenue on employees) will remain a key challenge for the IT industry.

The report cautions that availability of skilled human resource personnel will remain a key concern for the IT industry. Its size is expected to touch $90 billion by 2010. Software exports are expected to touch $60 billion by 2008, according to Nasscom.

The picture, however, is not all that gloomy. For instance, Citigroup analysts opine that onsite pricing has a good correlation with US IT services wages, which have been increasing in the past few years.

Data from the Bureau of Labor Statistics and dice.com suggest that the average US IT wages have risen more than 5 per cent, which is a positive sign for Indian IT services.

Besides, offshoring is leading to expansion in newer markets. There were four $50 million plus deals from non-traditional geographies for IT majors such as the Qantas deal (for Satyam and TCS) and Bank of China and Banco Pichincha (both for TCS) in the quarter ended December 2006.

Infosys added 40 per cent headcount in the last 12 months. Wipro, too, added 35 per cent employees in the past year while Satyam added 45 per cent billable staff, all indicating management confidence in the year ahead.

But Indian IT companies, though, are undeterred by talks of a US slowdown. If anything, they opine it will help them since outsourcing of services will increase with the US companies wanting to save on costs during a recessionary phase.

They argue that Indian outsourcing industry has over the years moved up the value chain and is doing work that is integral to the company's business or rather driving their business growth.

During a slowdown, the cancelled projects are those on the periphery and the Indian outsourcing industry has over the years proved itself, invested in resources and skills and moved into the core business areas. Their optimism is corroborated by an Edelweiss and BNP Paribas report that asserts Indian IT firms are moving up the value chain.

PWC Global Technology, Infocomm, Entertainment leader, Mitchell D Cohen, said, "Indian IT firms will surely work their way out of this slowdown. We do not see much impact, according to the report."