US slowdown cloud has a silver lining for Indian IT cos

Top ten leading Indian IT companies have given a QoQ PAT growth of 103% in Q1FY07. But since the US accounts for nearly 70% of India’s software exports, will the slowdown on IT spending affect the Q2 results of Indian IT companies? Frontliners like Infosys, HCL Tech, Polaris Software, I-Flex Solution, TCS, Satyam, Wipro have a strong foothold in Europe and especially in the US.

The experts tracking the sector closely suggest that not in the near term and definitely not in Q2FY07 will these companies see a negative impact. If at all there is an affect it will not be before the fourth quarter and that too will be a small blip in margins. Giving reasons, P Phanisekhar, Angel Stock Broking, said, “clients can postpone their spending for six months or so but will not shelve off the projects completely.”

In this argument, on whether US is really slowing down its IT spending and if yes, what impact will it have on global companies, especially the Indian IT sector, experts say that there is a positive emerging from this and that  markets are not seeing the silver lining.

Not only will the US slowdown boost the IT companies BPO growth figures, but also their subsidiary companies in US will see a beef up in profits. The reason being that US companies will cut costs by outsourcing more work to India. “India will remain an attractive area in terms of cost to the US as there is still a gap in terms of the wages given by American and Indian companies,” said an expert.

Citing an example, Sorbh Gupta, Pranav Sec, said, “For an example, GE outsources its work to Tata Consultancy, Satyam and Patni Computers. If GE feels the pressure of a slowdown then it will cut costs. For cutting costs it will outsource more to India. One of the primary reasons for outsourcing to India is cost cutting. Their US projects will also be out sourced to Indian IT companies.”

So, there is nothing to worry about in Q2 as experts expect a strong performance from top rung companies like Infosys and TCS. Satyam will be the only company whose margins will drop, as it will be giving wage hikes to employees in the oncoming quarter. Companies like infosys, Wipro and Satyam are their favorite picks.

But, brokerage firms like, Edelweiss Sec, suggest something else. Their research report says that they have maintained a Neutral stand on IT. According to them, the sector has a very robust outlook going forward and they feel that most of the positives are already priced in. Though the rupee at 46.5 a dollar continues to remain weak, the fear of a possible slowdown in the US economy could affect the sector negatively as there is a strong correlation between US capital spending and the Indian IT sector.

Click on page 2 to read what experts had to say