Vivek Seal & Amit Tripathi

New Delhi/Mumbai: Going into the fourth-quarter earnings season, the IT story, after all, may not be red all over. That is because the doomsayers seem to be running the risk of being proved wrong, at least partly.

While there has been plenty of bad news emanating from the American shores, the Indian IT and business process outsourcing providers are nevertheless seeing stable trends in their operations.

In fact, the silver lining in the dark clouds indicates the US recession to actually benefit them in the long run.

To put the record straight, early indications definitely show a slowdown in IT spending growth in 2008.

But then many expect the long-term outsourcing story to remain intact.

“Over medium to long term, the trend towards offshoring would surely increase,” a senior HCL Technologies official told DNA Money.

A survey of chief information officers (CIOs) by Merrill Lynch in the fourth quarter indicated a slowdown in IT spending growth for 2008 with just a 2.5% year-on-year hike in the budgets, a far cry from the 5.5% seen in 2007.

However, preliminary results from a follow-up survey in early March indicate a change in mood among CIOs with a 3% increase in budgets.

This is slight improvement from what we had found in our fourth-quarter survey and could be considered a good sign as the CIOs may feel slightly more positive about the IT spending environment, said the group of Merrill Lynch analysts led by Gregory Smith in their note to clients.

Indy Banerjee, director at outsourcing advisory TPI, said he would still bet on the long-term story of Indian IT.

“There will be a slowdown in decision-making (IT spend) in the immediate future. But in the long run it will be beneficial for large Indian players or foreign players with significant India presence,” he said.

Though agreeing with this view, an analyst felt Indian IT companies will not be able to command increases in pricing given the slowdown in the US although outsourcing will definitely be on the growth path.

“The current environment is definitely not for seeking a price increase … we have not conceded for any price cuts … there have been instances where clients are seeking to revisit the prices,” the HCL official said.

But clearly, cost arbitrage still continues to be the USP for Indian IT, including the BPO sector which has been seeing an improvement in rates with clear indications of increase in offshoring.

“We continue to see demand for high quality BPO services and our closure rates are better since January this year,” Neeraj Bhargava, WNS Global Services chief executive officer, said.

The company is seeing several engagements in insurance, travel,manufacturing, logistics, utilities and consumer products.

Moreover, a slowdown in IT spend in the US is expected to be offset by increases in growth in new verticals and geographies particularly Europe.

“IT services companies will look towards Europe and Asia to offset weaknesses in the US markets,” TPI’s Banerjee said.

This is corroborated by a senior Infosys official who did not want to be quoted on account of the silent period before the fourth-quarter results on April 14.

“Yes, we are getting bad news almost every day. All that we are doing is looking at other markets such as Europe and elsewhere, demanding better pricing, and leveraging on increased outsourcing,” he said.

This will also be a result of the investments companies have been making in alternative geographies to offset the overdependence on the US markets.

“The investments we have made in expanding our business in Europe over the last several years give us the scale and flexibility to capture short and longterm growth opportunities in this market. Going forward in 2008, our emphasis in Europe will be to continue to build out each of our horizontal lines of service and deepen our penetration in newer markets like France and Germany,” said an executive at Cognizant.

According to TPI, Europe, the Middle East and Africa (EMEA) bagged total contract value (TCV) of $41 billion on 220 contracts in 2007 in the IT domain, while the US bagged TCV of $26.6 billion on 194 contracts. However, the Merrill Lynch analysts have a word of caution.

“Given the pain across the financial services vertical, we cannot help but feel that there will be some negative surprises among vendors when they report fiscal 1Q08 results,” they said in their report. IT services companies are changing the manpower mix, opting for output-based pricing models and have seen growth in the fixed pricing model to have the price certainty in the volatile market.

Source : DNA