IT firms will get hurt by US raids

By Rosemary Arackaparambil

BOMBAY: India's once-booming software sector, already screeching to a crawl

due to the US recession and the attacks on New York and Washington, may be hit

again by the US-led air strikes on Afghanistan. Analysts say a hesitancy to

travel to India in the current situation could see key customers holding off

from signing offshore services contracts.

India's software sector services about 200 of the Fortune 500 companies and

derives over 85 per cent of its revenue from exports. These exports - over $6

billion last year - account for 14 per cent of India's total exports and two per

cent of GDP. Nearly 60 per cent of the exports are to clients in North America

and over 20 per cent to Europe.

"Any new sign-up involves a customer team visit of the site to meet

staff and examine facilities," said an analyst with a foreign brokerage who

did not want to be named. "Every quarter 5-6 per cent of revenue comes from

new sign-ups...that could be affected in the short-term." CLSA Emerging

Markets said in a recent report that India's high-tech centers of Bangalore,

Madras, Hyderabad in South India were unlikely to face any war consequences but

in the minds of clients "the risk associated with the India-Pakistan-Afghan

belt will exist."

"This could be the overriding factor over costs, and the outsourcing

especially for new clients may be postponed till the tensions ease," the

report said. But analysts added outsourcing as a business model was attractive

in the long term, and India with its cheap labour and convenient time-zone was

well positioned to benefit from that.

Slowing growth

With the US economic slowdown threatening to turn into a recession, the

scorching growth rates Indian firms witnessed in the mid-90s are already slowing

to a crawl. During those years, top companies doubled annual profits and

revenue, and the industry grew more than 50 per cent. But this year, April-June

profits rose in single digits on quarter, and are expected to be flat for

July-September.

The National Association of Software and Services Companies, which represents

the industry, has lowered its export growth forecast to 40-45 per cent this year

from 52 per cent. The sector's sky-high valuations are already down, with the

Bombay Stock Exchange Information Technology index down 34 per cent since

September 11 and 65 per cent since January.

The tech index lost 3.3 per cent on Monday after the attacks, but software

shares were up two to four per cent on Tuesday on value-buying. Research houses

have also started lowering their forecasts for the sector after last month's

attacks.

HSBC Securities cut India's software sector to neutral from overweight, CLSA

lowered its earnings estimate for next year to 13-18 per cent growth from 30-35

per cent earlier and J.P. Morgan reduced the current year's earnings forecast

for top Indian IT companies by 11 per cent.

(C) Reuters Limited 2001.