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Is Indian IT sector headed for a slowdown in 2012?

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It’s been a long tradition now – just like a temple priest flags off a ritual with sound of a conch (shankhnad) during startup; even software bellwether Infosys Technologies is accustomed to kick start the quarterly earnings season in style and panache.

In fact, few years ago, the results and annual guidance provided by this IT jewel used to set the mood rolling in the Indian stock markets and was considered as the most significant event of the financial year. Business news channels used to organize day-long analysis of the Infosys results announcement.

Infosys used to be the barometer of the health of Indian outsourcing industry. But, prior to 2008-recession, this frenzy was bust on the back of steep appreciation in the value of rupee to almost 40 per dollar. This led to huge under-performance of the IT industry amidst strong rupee, while the Indian benchmark indices basked in the glory of their lifetime peaks.

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Gradually, the weightage of the software outsourcing industry in the Indian markets have stooped to a low, where it can no longer duress the benchmark indices to dance on its tune. This pin down can be confirmed from the fact that despite Infosys disappointing the street with its earnings and stock price over last many quarters, Indian markets have remained stable.

Here’s one more instance – though Infy reported better than expected numbers in the Q3 FY12 amidst weaker rupee, the company disappointed shareholders with its biggest ever FY12 dollar guidance downer for the fourth quarter.

The outsourcing giant has signaled almost zero growth in revenues for the next quarter, as against its initial forecast to notch 3.2% to 5.2% growth during Q4 FY12. On annual basis too, the company rolled back its guidance from 17-19% to 16.4% in dollar terms.

In the words of Infosys CEO and MD, S. D. Shibulal:

“The environment is very uncertain. There is no definitive answer to the Euro zone crisis at this point. Client confidence is down. Budgets are getting closed; the early indication is that we will be flat with marginal down.”

He further indicated that pessimistic client confidence is very much likely to translate into curbed spending amidst cautious environment. In my opinion, the real pigeon will come out of the hat only during the next quarter, when the IT behemoth will spell down its FY13 guidance.

For sure, it would be the toughest task for Infy management to forecast its full year guidance at a time when its key market, the euro zone, is reeling under the severe debt stress, without showing any signs of the crisis subsiding anytime soon.

Contrary to Infosys, TCS has always remained away from providing earnings guidance, thus leaving lesser scope for equity speculators to lay their fragile bets on. However, even TCS share price fell to two-month lows on concerns of anticipated demand growth slowdown and delay in “discretionary spending” by the US clients going further.

TCS, India’s biggest software services exporter, reported Q3 FY12 numbers that were in-line with Street expectations with net profit up by 21.8% at Rs.2803 crore from the year-ago period, with margin improvement largely driven by forex benefit.

Moreover, brokerage firms have given thumbs down to the TCS – while Emkay Global Financial Services lowered its rating on the software major to ‘Hold’ on missing relatively modest expectations; CLSA is cautious on IT sector and expects TCS to under-perform on lower client confidence.

In a nutshell, Indian IT bigwigs can no longer rest on the laurels of depreciating rupee alone to yield them unexpected forex gains on a constant basis. Finally, it will boil down to outsourcing business prospects and earnings that will seal their fate, once the rupee-dollar equation settle down from volatility.

Do you see Indian IT industry softening up in 2012?

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