A challenging year awaits Indian IT sector
Although TCS third quarter results can't be extrapolated to other companies since most other large IT firms have different issues, there are some headwinds that run across the sector. That points to a pricky 2016/17 for India's IT club.
- Jan 13, 2016,
- Updated Jan 25, 2016 7:48 PM IST
Although the results can't be extrapolated to other companies since most other large IT firms have different issues, there are some headwinds that run across the sector. That points to a pricky 2016/17 for India's IT club.
While we will have to wait for industry body Nasscom to put out its expectations in February first week, in all likelihood, the growth could be a few notches lower than what the lobby body expects the industry to cobble up this year.
Nasscom predicted exports to grow 12-14 per cent in 2015/2016 to reach $110-112 billion. Given TCS latest numbers and the challenging environment many other companies now face, the industry may not match up to this estimate either. However, there is little time for Nasscom to revise this year's growth numbers.
Some of the secular headwinds that could peg back growth in 2016/17 are the following:
1. It is election year in India's largest market, the United States. More uncertainty around the visa regime or any policy to curb offshoring may lead to slower project ramp-ups.
2. The energy and utilities sector is in bad shape - while this affects IT companies with high exposure to oil and gas, it might end up in a 'coupling' impact on the banking industry as well. That would be perilous for most of the IT biggies as it is their bread and butter vertical, generating over 40 per cent of revenues.
3. Turmoil in the Chinese market might impact the manufacturing vertical of some companies or those with exposure to China and the Asia Pacific.
4. The IT industry, globally, is undergoing a transition. Its customers are boosting digital products and there is a lot of low-hanging fruit to be plucked. Nevertheless, building capabilities in digital takes more time than what many analysts think. On the other hand, the legacy business of Big IT - application development and maintenance (ADM) - is likely to come under pressure. Expect more aggressive pricing.
So, the takeaway from the TCS results is this: Expect performance volatility in 2016/17. It's going to be more challenging than you fathom right now. Sanchit Vir Gogia, Chief Analyst of Greyhound Research, has a small advice for industry watchers. "Don't focus on EPS next year. Go by the cash flow." That's a better indicator of health in hard times.
Although the results can't be extrapolated to other companies since most other large IT firms have different issues, there are some headwinds that run across the sector. That points to a pricky 2016/17 for India's IT club.
While we will have to wait for industry body Nasscom to put out its expectations in February first week, in all likelihood, the growth could be a few notches lower than what the lobby body expects the industry to cobble up this year.
Nasscom predicted exports to grow 12-14 per cent in 2015/2016 to reach $110-112 billion. Given TCS latest numbers and the challenging environment many other companies now face, the industry may not match up to this estimate either. However, there is little time for Nasscom to revise this year's growth numbers.
Some of the secular headwinds that could peg back growth in 2016/17 are the following:
1. It is election year in India's largest market, the United States. More uncertainty around the visa regime or any policy to curb offshoring may lead to slower project ramp-ups.
2. The energy and utilities sector is in bad shape - while this affects IT companies with high exposure to oil and gas, it might end up in a 'coupling' impact on the banking industry as well. That would be perilous for most of the IT biggies as it is their bread and butter vertical, generating over 40 per cent of revenues.
3. Turmoil in the Chinese market might impact the manufacturing vertical of some companies or those with exposure to China and the Asia Pacific.
4. The IT industry, globally, is undergoing a transition. Its customers are boosting digital products and there is a lot of low-hanging fruit to be plucked. Nevertheless, building capabilities in digital takes more time than what many analysts think. On the other hand, the legacy business of Big IT - application development and maintenance (ADM) - is likely to come under pressure. Expect more aggressive pricing.
So, the takeaway from the TCS results is this: Expect performance volatility in 2016/17. It's going to be more challenging than you fathom right now. Sanchit Vir Gogia, Chief Analyst of Greyhound Research, has a small advice for industry watchers. "Don't focus on EPS next year. Go by the cash flow." That's a better indicator of health in hard times.