(MENAFN - Khaleej Times) Is the honeymoon period over for the Indian software sector? The IT industry may not be able to sustain the phenomenon of high growth that it has been accustomed to all these days. It is a double whammy: revenue growth would be less buoyant and it may have to come at the expense of profit.
India's export-oriented information technology (IT) services industry is strongly coupled with the global economy in general and developed economies in particular and has come to faithfully reflect global ups and downs. Mirroring trends in the global economy, Indian IT majors slowed down in 2009, recovered momentum in 2010 and are now foreseeing a challenging year ahead.
A consensus seems to be emerging with Wbecoming the third large IT company after Infosys and Wipro to forecast a muted revenue growth. Gartner had also cut worldwide IT spending growth from 4.6 per cent to 3.7 per cent.
Though not listed in India, Cognizant's results get the same attention in the stock markets as the other top software companies. For the first time since the Lehman Brothers crisis, Cognizant has lowered its forecast for the full year, largely on account of financial services clients in North America.
While analysts were apprehensive of the European financial sector, they were increasingly getting comfortable with the US economy. Cognizant has stirred a hornets' nest by saying it expects banking and pharmaceutical sectors to remain sluggish for the rest of the year.
With the BFSI (banking, financial services and insurance) vertical contributing the most to the growth of IT services, analysts predict a bleaker scenario for tech stocks.
What applies to Cognizant also applies to Indian software giants like TCS, Infosys and Wipro. TCS is expected to be the worst affected as it has the lion's share coming from the BFSI space. Whereas Cognizant derives 41 per cent of its revenues from BFSI, TCS derives 43 per cent of its revenue from the sector, much higher than Infosys (35 per cent) and Wipro (27 per cent.)
In recent years, growth in domestic software demand aided decoupling from the West. This benefited mainly Tata Consultancy Services (TCS) and Wipro.
But now Wipro sees the recent slowdown in the Indian economy and indecision in the government affecting both private and government spending, thus adding to the challenges ahead.
It is true that Indian software companies are protected from the downswings in the global economy by the need for firms in developed economies to beat recession with productivity gains, resulting in a continued pipeline of orders for Indian IT.
So Indian software firms may still manage healthy growth rates, but it may have to come at the cost of profit margins.
Many of the Indian software companies are reaching a size at which it becomes increasingly difficult to sustain high rates of growth on a very high base. Competition, too, has intensified with key verticals such as banking and financial services becoming crowded.
Top tier firms such as Infosys, Wipro, HCL Tech and TCS are feeling the heat from mid-tier firms. They have to cope with much more uncertainty about winning new deals than before.
Moreover, multinationals such as Accenture and IBM are aggressively expanding their India headcount. With clients holding all the cards, contract periods have shortened, deal sizes have shrunk and pricing is being based on outcome, rather than man-hours.
The upshot is that the Indian software sector, much like other sectors, will now have to cope with much greater volatility than it has been used to.
Views expressed by the author are his own and do not reflect the newspaper's policy