Peeling the IT Layers
The era of abnormal growth for India-based IT service providers is nearly over. They've reported lower growth rates on both top-line and bottom-line performance in their latest quarterly results. So what does this mean? Is the IT sector heading for a downturn in the wake of a tough U.S. and global economic environment? Most equity analysts are already moving India-based providers down to "underperform" or "sell" ratings. Newsprint is consumed with stories and interviews on how the tough business conditions will promote cost-cutting outsourcing and off-shoring. Bottom line is: there's too much confusion in the marketplace regarding the performance of IT sector. To understand this financial performance from the Indian IT companies we need to peel back the layers a little. Firstly, the results appear subdued if you see them in relative terms. The picture is not as bad if you measure performance in absolute growth or business volume terms. Secondly, rupee-dollar fluctuations have been unpredictable and companies have found themselves caught on the wrong foot with large forex forward cover positions used to hedge against a strengthening rupee. While currency fluctuations are short-term and an external phenomena, the percentage growth is reflective of the size these companies have achieved now. But growth rates around 50 percent are simply not sustainable for a long period of time in most businesses. In fact, growth rates reported even now may not be sustainable as they're still in multiple of overall industry growth rates. As far as profitability is concerned, the industry has to converge with the settling Indian providers' profit margins vis-a-vis global peers. To compete for large outsourcing transactions, investments in beefing up global sales and delivery capabilities are imperative. My take is that India-based providers will continue to do well in the foreseeable future. However, the era of abnormal growth is nearly over for them and coping with the U.S. recessionary conditions is causing providers to channel management bandwidth into Europe and Asia Pacific. As a result, globalization is gaining momentum for them at a quicker pace..
