IT sector witnessing short term pains

Thu, 10 May Pre-Open

   Previous Close   

   09:30 am   

   11:30 am   

   01:30 pm   

   Closing   

Recently, major Indian Information Technology (IT) companies have declared their results for the quarter ended March 2012. The growth was definitely sluggish in comparison to the stellar growth seen historically. What was more disappointing was the near term future outlook projected by many Indian IT giants such as Infosys and Wipro. And, the guidance given by Infosys, the erstwhile bellwether of the software sector came as a real heartbreak for the investors. The guidance was even lower than the growth projection, estimated by the industry body NASSCOM (the National Association of Software and Services Companies).

The reason for sluggish performance is not very hard to understand. Fortune of the Indian IT sector is very much dependent on the economic health of the developed world such as the US and the Europe. These economies are reeling under several uncertainties. In turn, growth prospect of the Indian IT sector is getting hurt. Client budgets are either flat or marginally down for the calendar year 2012. Discretionary spending by the clients is under pressure. The clients are very cautious while making their spending decisions. And most of the clients are awarding short term projects.

Even NASSCOM has given an estimation of 11%-14% growth for the sector for financial year FY13. This is well below the historical high growth rates. Cognizant, which was delivering a robust growth for the past several quarters, has scaled down its guidance as well. Now the important question rising in the investor minds whether the sector has already moved into a slowdown phase.

Well, from the near term perspective, there is every reason to believe that next few quarters would not witness any spectacular growth. The uncertainty in the global demand environment continues to prevail. Clients from the North American market are putting their spending on hold, especially in the Banking, Financial Services and Insurance (BFSI) segment. Europe is still not out of woods.

However, all this does not affect the long term growth prospect of the sector. The very reason for the outsourcing and the spectacular growth of Indian IT industry is still there. The fact of the matter is that the need to increase business efficiency is only growing by the day. Once economic stability returns in the developed countries, clients in these geographies would look for more cost efficiencies. All this would give a philip to the Indian IT industry in the long run. Hence, days for good growth in the sector are far from over.