| COLUMN |
August 31 2009
INDIA’S Business Process Outsourcing, or BPO, industry has staged a smart recovery from the bottom of the heap. The June quarter performance of leading IT companies has surpassed market expectations.
Information Technology stocks have yielded highest returns since the BSE Sensex plunged to the four-year low in March. The Sensex has surged 95 per cent from its four-year low of 8,160 in March, 2009 to 15,922 now. In comparison, IT stocks have provided up to 500 per cent returns from their 52-week lows.
Industry leaders have started expressing guarded optimism about the prospects for the current year and the next. “The IT industry is now in the stable phase. We are not in the downturn any more,” says S. Mahalingam, Chief Financial Officer, Tata Consultancy Services.
What accounts for the renewed investor interest in the IT stocks and cautious optimism of industry leaders? For one, the IT-software and BPO industry has shown a remarkable resilience in coping with the global economic crisis. This is reflected in the performance of the industry in 2008-09 as also in the financial performance of leading IT companies in the quarter ended June 2009.
As per Nasscom figures, the Indian IT-BPO services sector achieved revenues of $58.8 billion in 2008-09, up 13 per cent from $52 billion in the previous year. Exports rose by 14.60 per cent to $46.3 billion. The domestic segment did even better, with revenues rising 21 per cent from Rs470 billion in 2007-08 to
Rs570 billion.
The Nasscom survey notes that worldwide IT spending growth is expected to decline in 2009 and 2010. The environment continues to be challenging with global demand being weak, absence of large deals, vendor consolidation and pricing pressures.
Yet, the fundamentals of IT stocks have improved with the growing realisation among policy makers in the West that outsourcing is not a luxury but a necessity. Cost cutting is crucial for corporates and outsourcing is a vital option.
With exports accounting for about 80 per cent of its revenues, the IT-BPO industry is highly sensitive to the economic conditions in the developed economies. The positive Gross Domestic Product, or GDP, growth in France, Germany and Japan, recovery in the US housing market and earnings of Chinese companies can only boost the sentiment in an industry as dependent on the world markets as IT-BPO.
At the same time, the domestic market is expanding at a rapid pace. Nassom survey poits out that the domestic IT-BPO market is expected to grow by 15-18 per cent in the current year and may reach Rs650-670 billion.
On their part, smarter companies are working overtime, identifying new niches, new markets, creating new systems to get the bucks in this tough environment and prepare for better times. IT companies are modifying their product lines, trying to reduce their dependence on the US market and focusing on ‘recession proof’ sectors such as pharma and healthcare, education, telecom and utilities to tide over the dip in volumes. IT majors are also pursuing what is known as ‘non-linear’ growth strategy, where the revenue growth is delinked from the number of people added. This is expected to improve their profitability.
The IT stocks, therefore, have bounced back smartly and may gain further ground in the weeks and months to come. The gains, however, will not be shared equally or even equitably by all the players in the sector.
Large and mid-cap companies and small companies with strong niche presence are likely to benefit much more than smaller fries. Investors will have to be very discerning and discreet in re-entering the market.
Views expressed by the author are his own and do not reflect the newspaper’s policy.
|
|