Renewed US Demand To Lift Infosys, IT Sector Outlook

Are fortunes of the Indian IT sector in general and Infosys in particular set for a revival?

Technology consultancy Forrester Research has forecast that an improving economy will spur US businesses and government bodies to increase information and communications technology purchases by 6.1 per cent in 2014, the steepest gain since growth of 5.8 per cent in 2010. This has given birth to the hope that the strong US demand for information and communication technology will help boost the fortunes of Indian IT companies like Infosys, dependent on US market for growth. Its faster-growing rivals, TCS, Wipro and HCL Technologies, however, will also benefit.

 

Forrester has forecast a growth of 5.7 per cent in 2013.

 

Hopes for renewed US tech spending comes at a time when the new IMF report says global economy is actually worse off then previously thought. China, India, Brazil, Mexico and other developing countries are growing slower than expected. That weakness, combined with Europe’s enduring recession and middling growth in the United States, means the global economy will grow at 3.1 per cent this year, about the same as last year and down from the IMF’s April forecast of 3.3 per cent. (IMF Cuts Global Growth Forecast As Emerging Markets Slow)

Infosys, India's second largest computer services exporter, once seen as a bellwether for India's $108 billion IT industry, derives 62 per cent of revenues from North America, a larger share than competitors TCS and others.

 

"The demand environment is now quite solid," Ganesh Natarajan, CEO of mid-sized Indian IT outsourcer Zensar Technologies told news agency Reuters. "This is the right time for all the pent-up customer demand."

Infosys last month returned Narayana Murthy to the helm more than a decade after he stepped down as chief executive to help reverse falling market share and end two years of disappointing results. On 9 July, sales head Basab Pradhan quit Infosys.

 

The Bangalore-based company, which reports its June quarter results on Friday, has struggled to reap the rewards of an initiative to generate a bigger share of its revenue from proprietary software, and has lost market share to Tata Consultancy and HCL in recent quarters.

Not much is expected from Infosys in the April-June quarter too. Infosys may miss April-June operating profit consensus forecast when it reports results on Friday, 12 July, says StarMine data.

StarMine's SmartEstimates, which places greater emphasis on forecasts by top-rated analysts, expects Infosys to report an operating profit of Rs 2,893 crore ($475.31 million) for the quarter compared with a consensus mean estimate of Rs 2,994 crore. Last week, Morgan Stanley also said Infosys may cut that forecast to 4-6 per cent.

 

Some other analysts expect Infosys to retain its April forecast of 6-10 per cent revenue growth for the fiscal year that ends next March.

 

Infosys' outlook lags the 12-14 per cent growth estimated for the sector in financial 2013-14 by the National Association of Software and Services Companies, an Indian industry group.

 

"IT services from a macro perspective is looking good. Now within the gamut of IT companies, all of them may not uniformly benefit," said Tarun Sisodia, a director at IT industry advisory firm Chanakya Niti Consultancy Pvt Ltd.

 

Looming large over all Indian IT companies is the possibility that the United States, the sector's biggest market, will implement as early as next year new visa rules that will make it more costly and difficult to send workers there.

 

Infosys also faces management challenges. The head of sales said on Tuesday he had left, and investors have voiced concerns that the company is too reliant on its founders for leadership.

 

"A people disadvantage exists today at Infosys," Sisodia said. "There is a people advantage at Tata Consultancy."

 

Shares in Infosys have risen 4.1 percent since Murthy returned to the company on June 1, in line with gains in the IT sector.