This page is temporarily not available. Please check later as it should be available shortly. If you have any questions, please email customer support at firstname.lastname@example.org or call 800-767-3771 ext. 9339.
Stocks of companies in the IT Services/BPO Sector have performed impressively along with the broader market averages during the current June quarter after being beaten down since the housing-market-driven overall market collapse in September of 2008. The Business Process Outsourcing (BPO) companies were all under significant pressure even before the economic malaise with a slowdown in its growth trajectory.
In other words, the BPO companies were all trading with an early 2009 growth/recovery story in mind. However that thesis has seen some re-evaluation, given that overall recovery prospects have been pushed towards the latter half of 2009 or early-2010.
Shares of nearly all of the companies in the group got a boost immediately following the election results in India on May 17th. Shares of Patni Computers ( ) have appreciated the most, nearly 77% YTD (as of June 2nd), compared to the heavy-hitters in the industry: Infosys ( INFY - Analyst Report ) up 43.6% YTD, Wipro Inc. ( WIT - Snapshot Report ) up 50.1% YTD, Cognizant Tech ( CTSH - Analyst Report ) up 43.6% YTD and Tata Consultancy ( ) up 46.5% YTD.
However, it should also be kept in mind that most of the companies in the IT Services sector had also seen similar price declines on a relative peak-to-trough move in the 2008-2009 time period; PTI's price, for example, had fallen 73.9% from its relative high of $16.56 in January 2, 2008 to its recent low of $4.31 in March 3, 2009. On the basis of similar peak-to-trough price move, WIT had declined 64.6%, INFY 57.2%, CTSH 60.1% and TCS.NS 57.7%.
Generally speaking, the view of most investors toward the India-based IT services providers firms have been sounding incrementally positive of late. Infosys and Cognizant have signaled that the worst may have passed and that 2009 IT budgets have now largely been finalized, indicating better visibility by major clients into their IT spending plans.
These statements appear to have the effect of improved perception among investors for a recovery and may have contributed to the rally in the group recently. However, we think that the fundamentals continue to be challenged and are not likely to pick up pace at a rate that many investors are hoping for. New bookings remain light and pricing pressure continues to roll through the contract backlog.
The Impact of a Weak Financial Services Sector
Among the major players in the IT Services sector, the percentage of total revenues derived from the financial services vertical is split between Cognizant and Genpact (G) at roughly 45%, 43% for Tata Consultancy Services, 35% for Infosys and approx. 25% for Wipro. Given that a major portion of this exposure (more for the application outsourcing firms and less for the BPO firms) can potentially come from discretionary software development and other projects, the concerns raised about the negative impact of further tightening of bank IT budgets in 2009 is justifiable.
The attempts by the Indian IT outsourcers to mitigate these concerns by disclosing the revenue mix from the investment banking sector compared to the more secure insurance or commercial banking sectors have been met with tepid response so far. The differentiation has not gained much ground as the contagion seems to have spread to every corner of the financial services vertical.
While Infosys, Cognizant, TCS, Wipro and most other Indian vendors have alluded to the negative impact of a weak financial services sector, most of these companies after having posted somewhat strong sequential growth rates in their financial services verticals in Q2/Q3:FY2008, have began to falter. The current growth rate expectations have come down considerably since late-2008. It is, however, in line with expectation as a large portion of growth recorded in H2:2008 comes from the ramp of deals signed in 2007/2008.
Needless to say, most investors are now looking beyond H1:2009 and are weighing how the calamity in the financial services vertical will affect overall 2009 results. Investors are well aware that the March 2008 shock from the collapse of Bear Stearns caused several pending Indian application and business process outsourcing deal awards to get delayed, and there is no reason to believe that the September 2008 shock won't have had the same effect.
The current feedback from the Indian outsourcing companies are still somewhat tempered. There are indications that Q2:FY2009 have fared better sequentially, but datapoints also indicate that enterprise IT spending is still depressed and new offshore IT bookings remain muted with a persistent 15%-25% pricing pressure. While existing projects are not necessarily being canceled, new deal activity has slowed dramatically.
Infosys indicated recently that many clients are still pushing the company to reduce its delivery costs so as to lower clients total offshore IT spend. The fact that most Indian vendors have very large (30%-50%) exposure to the financial services sector doesn't help and some vendors have high exposure to clients that are reducing headcount materially.
Many of the outsourcing advisory firms (which advise large enterprises on their deals with the offshore and domestic outsourcing vendors) are also reducing headcount and looking for strategic combinations. Add to this the negativity associated with the current anti-outsourcing sentiments and the fallout from the Satyam (SAY) debacle, and the picture is not so bright going forward.
There is, however, a silver lining in the dark clouds. Some of the companies have indicated that the level of client discussions is still healthy, even though these discussions are converting to signed deals at a much slower clip. It also appears that deal activity in continental Europe and in the local Indian market is healthy, although neither region represents a material portion of the revenue mix for most of the Indian outsourcers.
The consensus view is that the current slowdown will last at least a few more quarters and that Q3/Q4:FY2009 will be the recovery quarter with the industry in full gear in 2010. The fact remains that visibility is so low that no one really knows when companies will feel comfortable enough to move forward with strategic offshore outsourcing decisions. The new bookings recovery was initially pegged by the Indian vendors for Q4:2008 and then it was pushed to Q2:2009. The CEO of TCS indicated recently that a Q3:2009 recovery is more likely.
Also, the management of Infosys indicated that this year it is looking for growth for the IT industry at somewhere in the region of 15 percent, compared to 30% last year.
Please login to Zacks.com or register to post a comment.