Last month, when Cognizant, the world’s fastest-growing IT company, stated that it would pay its senior executives 100% of performance-linked stock units if its topline grew by 16% in 2013, IT stocks back home took a beating, with the BSE IT index shedding over 3% in the week after the announcement. Even if the market was overreacting, considering that the 16% number was the management target not revenue guidance, the nervousness is not completely unfounded. Investors’ worry seems reasonable as, historically, Indian IT companies’ growth rates have been about 10-12 percentage points lower than that of Cognizant. The fear is that if Cognizant is targeting about 16% growth, then Indian IT firms will probably be in the mid-single digits.
Certainly, the year ahead doesn’t look too promising. Companies have been cutting back on their spending already and global macro indicators remain unstable. “Eurozone is partly facing a slowdown while the rest are already in a recession. And with the fiscal cliff, the US economy could face a slowdown or recession,” says Hitesh Shah, director, IDFC Securities. “In CY12, IT spending was practically flat and the situation is likely to repeat in CY13,” he adds.
Sandeep Muthangi, analyst, IIFL Research, in his report says that the outlook for FY14 looks grim. He has downgraded the estimated FY14 revenue growth for larger Indian IT vendors from 11% to 8%. This is largely due to poor growth prospects in BFSI (less than 5%) and lacklustre demand environment in other key verticals (telecom and manufacturing).
The hit to the topline will, of course, get reflected in the net margin as well. Muthangi states that Infosys’ higher realisations may come under attack as traditional application development and management (ADM) services are under risk of commoditisation, especially in a low-growth environment. However, the outlook for ç is not so dire if one goes by what Priya Sunder, analyst at Avendus Securities, writes in her report. “Lower exposure to discretionary spending of clients makes TCS the most resilient to volatility in demand.” Her target price of ₹1,463 implies a 16% upside from the current price of ₹1,258.
The only source of solace for Indian IT companies is the depreciating rupee. In spite of strong capital market flows, the rupee has remained weak against the dollar. Analysts, though, are worried that Indian IT companies could miss their guidance for FY13. Going forward, investors as well as companies have to reconcile that the IT sector is no longer the growth powerhouse that it once was.