6 things worrying Indian IT...

The very first rays of sunlight are finally peeping out. Speculations are rife that the market has bottomed out. Companies are seeing signs of improvement in their industries, sending their share prices higher. Technology companies too are seeing a revival in demand. Factories are cranking up production again as retailers restock bare shelves and electronics makers resume buying components after drawing down inventories. Indian IT sector too is seeing recovery signs, however, there are still a number of issues that is making the industry anxious. Here’s looking into the six things worrying Indian IT.

Growing protectionism in US

Another worry for Indian IT companies is the growing protectionist sentiment in the world's largest capitalist country. US President Barack Obama's latest rhetoric 'say no to Bangalore and yes to Buffalo,' has created ripples in the corporate India. President Obama has proposed to tax the expenditure incurred by US companies on availing services from outside the country from 2011. The move has been proposed to discourage outsourcing and contain the flight of jobs to other countries. Azim Premji, chairman, Wipro, India’s third-largest software services exporter, said that the protectionist measures of the US government is a matter of concern. Incidentally, the steps proposed are contrary to the statements made by the US President on expanding free trade at the recently held G20 summit.

Budget cuts

Though IT industry can sense revival, spending cuts at clients' end is still not over. Says, Infosys' Chief Financial Officer V Balakrishnan, "At the macro level there is some confidence back, people are slightly more comfortable, but on the ground things are still the same," "Customers are still focused on cutting their spending, so the IT budgets are under pressure," he said. "If the second half recovery happens, like what the market predicts, possibly it will be in the beginning of the next calendar year." While market is showing signs of having bottomed out, demand is still to look up. The risks to pricing and the lurking protectionism is further adding to the worry of Indian IT companies.

Bankruptcy concerns

The looming bankruptcy of some US giants too is worrying Indian IT companies. Since the bust of financial giants Lehman Brothers and Merryl Lynch, several other US giants too have filed for chapter 11, adding to the woes of tech firms. General Motors, a client of Tata Consultancy, too may file for bankruptcy. Another big client of Indian IT majors, Nortel Networks, filed for bankruptcy in January.

Project cancellation and delays

According to John McCarthy, principal analyst for Forrester Research, "The economic downturn is so severe that people are not making decision on investments and they are cancelling new project works. It's very tough time for these guys." "The golden age of massive profits for offshore companies is over." But as global companies scramble to chalk out new business strategies in the post-Lehman world, caution is the buzz word, especially for longer-term contracts worth millions of dollars.

End of tax holiday

To add to the worries of the IT companies is the nearing end of tax holiday. Industry's apex body Nasscom has been seeking extension of software revenue tax benefits for a few more years. The benefits, ending in March 2010, would hit the earnings of IT companies, with the tax outgo raising. The tax holiday scheme for software firms located in technology centres expires in March 2010, and this is expected to hit earnings of top firms from April 2010 onwards by raising their tax rates to 18-22 percent from about 10-15 percent currently, analysts said.

Stretched valuations

India's IT sector index is up 26 percent this year, underperforming a 42 percent rise in the 30-share market index. Infosys and Tata Consultancy have both gained about 35 percent and Wipro is up 60 percent, but analysts remain cautious as customers still struggle. Top IT firms were unlikely to move back into peak valuation range of 20-30 times forward earnings as the days of heady growth rate are over, says Religare's Hichens Harrison. Valued at more than $18 billion, Infosys trades at 15 times forward earnings, while Tata Consultancy is at about 13 times and smaller rival Wipro is at about 16 times."Valuations are stretched given our forecast 2-yr flattish earnings growth. Moreover, we see downside risk to earnings from recent Rupee appreciation," Bank of America-Merrill Lynch analysts said in a report titled "Treading on thin ice: Downgrade Infosys, Tata Consultancy."