IT's is the focal point

S. Vaidya Nathan

THE SLOWDOWN in the US economy; American companies cutting down on IT spending; the slowdown in the telecom sector; the sharp fall in stock prices; the few clues on what the impact might be on the performance of IT companies in India; the keenness of the market to get a view on what the companies thought of the possible impact -- all this led to a focussing on the performance of the information technology (IT) companies.

That is why even more than the earnings announcement for the January-March quarter, the focus was on the indicators of what is in store for the coming quarters. In this regard, there is a diverse range of views. It is doubtful if the industry has anything concrete on what the slowdown might mean for the IT sector. This means the performance of these companies in the next quarter or two might continue to attract attention.

The opinion on the possible impact of the US slowdown has ranged from the conservative stance of Infosys Technologies to a bullish note struck by Wipro. Infosys has come out with the view that growth rates for 2001-02 may slow down to as much as 30 per cent. This was the view of both Mr N. R. Nararyana Murthy, Chairman and CEO, as well as Mr Nandan Nilekani, Managing Director. This view, articulated at the time of the earnings announcement some 20 days back, was recently reiterated by Mr Narayana Murthy who said that the industry may grow by 30 per cent this year.

In sharp contrast, the Wipro Chairman, Mr Azim Premji, stuck a bullish note. Some of the other companies such as SSI and Satyam Computer also indicated that they would adjust to the impact of the slowdown as it emerges. Companies such as Hughes Software have indicated that the growth rate would continue to be good.

The National Association of Software and Service Companies (Nasscom) has revised the growth rate to around 45 per cent. The ground reality may be somewhere between the conservative and bullish stances of Infosys and Nasscom respectively. Wipro, as an individual company, might manage to do well and stay considerably ahead of the industry average.

In the earnings announcements, some of the operational parameters indicated by the companies provide some comfort. The likes of Wipro, Infosys, Satyam, HCL Technologies have all added more clients than in any other quarter in 2000-01. They have also succeeded in adding revenue sources in Europe and Asia-Pacific as a way of diversifying their revenue base. This is to avoid the possibility of the US slowdown taking a bigger knock than what is been factored in. The slowdown has halted the process of scaling up of revenues and moving up the value-chain -- two focus areas for the majors. Initially, there was a burst of optimism that the slowdown would have minimal impact as outsourcing would increase.

This may well happen but may take a few more quarters before it gets reflected in the revenues and earnings of Indian companies. The outsourcing may well go to a select few and here the frontline companies bear watching. Though the outsourcing may involve moving down the value-chain, even the bigger companies may have no choice as they need all possible revenue streams to keep the earnings growth at healthy levels. This may be preferred to having a larger bench and waiting for better times to return.

From a macro perspective, the kind of addition to the workforce planned by the likes of TCS, Wipro and Infosys is also a healthy one. But for 2001-02, the quarter-on-quarter growth rates may be sluggish at less than 10 per cent. In fact, Infosys has projected this at less than 4 per cent for the next quarter.

While the bigger names may come out in reasonable shape, the impact of the slowdown could enhance the risk levels associated with the second- and the third-rung companies. Even companies with a decent scale of operations such as Mastek, Aptech, NIIT and Geometric Software have had a tough quarter. Stay clear of these stocks is the message as far as this sector goes.

Even when it comes to frontline tech stocks, direct investing in one or two may not be advisable. It may be better to go the sectoral funds route and pick such funds as Kothari Pioneer Infotech that have consistently stayed with frontline stocks. Also any investment commitment must be done in phases as any further decline in revenue and earnings in the next two quarters could lead to some downside in the prices of some scrips. A phased investment plan would ensure the pricing in of the possibility of further declines.

But avoiding frontline tech stocks may not be right approach as that mean less than market returns over the long term considering the growth potential in the sector.