IT: Laid low by inertia of demand

IT: Laid low by inertia of demand

After decades of successfully running in India and abroad, the outsourcing industry has seen a year that sent shivers down the collective spines of many tracking it closely, not to mention those running the show from within.

“Looking ahead to 2012-13, global macroeconomic challenges persist. The world is witnessing slower GDP growth as well as slower job growth across developed and emerging markets. Currently, there is continuing volatility,” Tata Consulting Services (TCS) Managing Director and Chief Executive Officer N Chandrasekaran had said in the company’s annual report for fiscal 2012.

The statement, which more or less was shared in different words by other CEOs, underlined the industry’s growing concern to remain relevant in an environment that had begun to exhibit conspicuous signs of unfriendliness to the idea of outsourcing. This was especially true of clients who had started to tighten their purse-strings.

Infosys, whose forthcoming quarter revenue guidance and yearly guidance had long been an industry benchmark, said in July that it wouldn’t give a quarterly guidance henceforth, owing to excessive volatility prevailing in the global market. The Bangalore-based IT bellwether did not provide a quarterly guidance — the first time since its inception — and lowered the full-year dollar guidance to “at least”, in CEO S D Shibulal’s words, 5 per cent to $7.34 billion from the previous 8-10 per cent.

“Given the present environment, we are confident of at least 5 per cent growth for the full year and we are not giving any quarterly guidance as there are some delays in decision making on the client side, and they are holding cash,” Infosys CEO S D Shibulal had said.

Rupee depreciation

Consequently, the Indian rupee fell by almost 22 per cent in the five months leading to May, making it better for exporters by way of yielding greater value for their dollar-denominated exports. The IT industry, which earned $69 billion in exports in 2011-12, gained from rupee depreciation but there was a twist in the tale. Shibulal said that clients were asking for hefty pricing discounts to make up for the extra money paid.

Talking to Deccan Herald on the rupee weakening against the dollar, iGATE Chief Financial Officer Sujit Sircar said a few months ago, “It (rupee fall) is a positive thing for Indian IT in the short term but not in the medium term. Travel expenses will shoot up with the rise in dollar value.”

However, Noida-based HCL Technologies showed promise this year with higher profit growth than expected for the quarter  because of lower losses on the forex front.
Interestingly, industry growth rate forecast by Nasscom in February pegged at between 11-14 per cent was later revised in November to 11 per cent citing the economic slowdown.

M&A Drought

Consolidation and growth strategies were further finetuned by the industry in 2012. However, companies like Infosys, Wipro and Cognizant went all out to replenish their M&A (mergers and acquisitions) shopping baskets.

But much of the M&A activity in 2012 was a mere patch on those in previous years. Wipro was about the only major M&A actor during the year. Wipro announced in December that it signed an agreement to acquire 100 per cent stake in LD Waxsons Group, a Singapore-based fast moving consumer goods (FMCG) company for an all-cash deal of about $144 million (Rs 786 crore). The company’s revenues on a run-rate basis for fiscal 2012 are about $68 million.

This transaction, Wipro said, will give it leadership position in the facial skincare market in Malaysia and Singapore; expand its presence in China, besides enhancing its position in other Asian markets. Earlier, in November, Wipro had demerged its non-IT businesses primarily with a view to improving the operating margins of its flagship IT business.

The company board approved the demerger of Wipro Consumer Care & Lighting (including the furniture business), Wipro Infrastructure Engineering (Hydraulics & Water businesses), and Medical Diagnostic Product & Services business (through a strategic joint venture), into a separate company to be called Wipro Enterprises Limited.

Wipro Limited will remain a publicly listed company focussing exclusively on information technology, while Wipro Enterprises Limited will be an unlisted company. Wipro then announced the divestment of its Sunflower brand to Cargill.

Infosys, on its part went ahead and acquired Zurich-based consulting firm Lodestone for Rs 1,932 crore in September, which analysts said was much smaller a deal than expected.
Cognizant acquired six companies of the C1 Group, an independent consulting and IT services firm based in Hamburg, Germany for an undisclosed amount in December.

Partner with technology advisory company Information Services Group, Siddharth Pai, told Deccan Herald, “In 2012, we mostly saw IT contracts being renewed and not many new ones.” He added that it was a pivotal year for the industry.

Looking ahead, analysts believe that 2013 will give rise to newer verticals and decision making would improve as clients would now have a clear picture of policies with President Barack Obama getting re-elected in November. But companies are still wary and feel that budgets will remain flat. “Crossing the $100 billion aggregate revenues for the sector, with a year-on-year increase of about 14 per cent, 2011-12 was a milestone for the Indian IT/ITeS industry. However, this year (2012-13) has been a contrast with the sector going through a challenging phase,” PwC India Leader Technology Sanjay Dhawan said in a statement. “The industry is expected to close fiscal 2013 with about 9-10 per cent growth.” “Our clients indicate that though their budget cycles are just kicking off, suggestions are that the overall IT funding will remain flat in 2013. They also echo the dual mandate suggesting that the benefits accrued from continued adoption of global delivery models would be used to fund innovation and new capabilities,” Cognizant Group Chief Executive (Technology and Operations) R Chandrasekaran said.

HCL Technologies Senior Corporate Vice-President Shami Khorana said that in 2013, they believe the macro environment will continue to remain challenging with IT budgets expected to be flat.

We continue to maintain a positive outlook focusing on the US and Europe’s churn market and hope to deliver industry leading growth once again, Khorana added. Thus, however dismal it looks right now, this is an industry which proved its endurance during the recession since 2008. It’s just a matter of time that the industry reinvents itself and evolves from a time-and-material based outsourcing business to a value-adding sector.

Comments (+)