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What is in store for IT sector?

CHENNAI: Even as the curtain goes down on 2008, the year has seen some key events that have had an impact on the business community as a whole within and outside the country.

When factors such as volatility in the petroleum prices and stock markets, currency fluctuation, non-availability of credit and, most importantly, the sub-prime crisis, were shacking the global scene, the Indian economy has to grapple with additional issues such as the political fall-out of the Indo-U.S. nuclear deal, waiver of agricultural credit worth Rs. 60,000 crore and the terrorists’ attacks on Mumbai.

Many sectors — both information technology (IT) and non-IT — have begun to slide even as 2008 has ended. Most importantly, the IT sector, which played a crucial role in the growth of the gross domestic product (GDP), has underperformed during 2008. This is notwithstanding the fact that this sector had seen some mega deals by large, medium and small players alike. Considering these factors, the question is what is in store for the IT and ITeS (IT-enabled Services) companies? Diptarup Chakraborti, Principal Research Analyst, Gartner, has a positive note to say.

“The worst case scenario predicts the IT industry to be worth $3.52 trillion globally.

“That is about three-and-a-half times the size of India’s GDP. So, even though there is to be a slowdown and even negative growth in some sectors, to say that the IT industry will not be successful in 2009 would not be right. However, the best companies do better in tough times and the not-so-good ones fall by the wayside. This is likely to happen in 2009, if the situation does not improve or at least stabilise in the coming few months,” he says.

According to Mr. Chakraborti, most companies increase their R&D budget during recession. Earlier, companies such as Intel and Microsoft have done it. But cash availability is the lifeline for most companies.

Even though their revenues grew, many companies over the past few months have gone bankrupt because of working capital crunch.

However, the Chief Financial Officer of Zylog Systems, Sridhar, is of the view that the current situation will be conducive to large players who are going up the value chain. But pure-play services companies will have difficulties in achieving the same level of growth that was witnessed during the last five years, he adds.

Is the confidence in capitalism has been shaken because of the U.S. bank failures and scandals? Even as a debate rages on this issue, Mr. Sridhar is convinced that many companies, especially in the BFSI (banking, financial services and insurance) space, are going to be increasingly monitored. Once the new government is installed, they may be compelled to go in for more compliance issues.

Sam Santhosh, Chief Executive Officer and Managing Director, Calsoft, feels that “since U.S. President-elect Barack Obama is a pro-science man, policies on funding for life sciences might change and this, in turn, will generate more business for IT-related services in this area.”

What are the growth opportunities in 2009? With customers looking to do more with less, there is going to be greater focus on cost rationalisation and running the business more effectively. There will be great demand for businesses such as application maintenance, BPO/KPO (knowledge process outsourcing) and ITeS services.

Similarly, newer geographies such as Europe and emerging markets will become future business centres for Indian IT companies, says R. Chandrasekaran, President and Managing Director, Cognizant. Since the global economy is now going through its worst crisis, to expect that the industries in IT and ITeS sector, which are largely dependent on the U.S. market, will remain unaffected would be like living in a fool’s paradise, says Mr. Chakraborti.

In the coming few months, the industry will witness demand slowdown, tough price negotiations on existing and new contracts, prioritisation of projects from customers and even consolidation within the industry.

IT companies will find it more difficult to acquire companies as funds are expected to be tough to get and due to the erosion of stock prices, the stock swaps may not be enough to finance such purchases, he points out.

With the rupee moving in a two-sided manner against the U.S. dollar, it is difficult to assess the benefits that may be accruing to the IT industry which is mainly dependent on the traditional U.S. market.

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