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03 June 2009

SECTOR REVIEW : IT SERVICES POST FY 09

The Lehmann collapse and its aftermath seriously jolted the IT services majors. This is very evident in the analysis of the annual results of these companies.

The results reflect the debilitating business environment. Over dependence of the sector on the US and Europe, a sort of wage arbitrage, has skewed the earning profile. A very high and rising unemployment rate (8.9% in the US in April) threatens to remove this wage benefit accruing to these firms. A constant stream of dollar investments in India strengthens the Rupee while reducing the attractiveness of the Sector. This is why the expectation from this sector was lowered so sharply in the period Sep 08 to Mar 09. The graph below reflects the dampened sentiment.

In such a challenging business environment, the IT Services majors were not able to improve their revenue numbers. The Big Three in fact faced a decline in revenue, quarter-on-quarter, in their organic numbers. However for TCS and Wipro, their acquisitions helped grow the top line. This lack of growth is attributable to two factors - lesser business volume and lower pricing.

So in order to overcome the lack of growth in revenue, the companies focused on reducing cost, largely by controlling Selling, General and Administrative costs and doing lesser on site work. This strategy has its inherent limitations as it cannot be stretched beyond a point.

The Bottom Line
Well the business is not likely to grow significantly in the near future. Savings will come only from cutting costs and reducing headcount (the single largest expense) and in a business which is designed for systemic efficiency, one may not have much scope for the former. Not a very bright future, it seems. 

2 comments:

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Anonymous said...

That's interesting that a constant stream of dollar investments in India strengthens the Rupee while reducing the attractiveness of the Sector. It's right that for TCS and Wipro, their acquisitions helped grow the top line. Nice blog.

Regards: IT Outsourcing

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