The current global economic and market downturn has taken its toll on the IT Services group as a whole. The Business Process Outsourcing (BPO) companies were all under significant pressure even before the economic malaise, with a slowdown in its growth trajectory.
In other words, the BPO companies were all trading with an early 2009 growth/recovery story in mind. However, this thesis is now undergoing some re-evaluation, given that overall recovery prospects are being pushed towards the latter half of 2009 or early-2010.
The current financial market fallout adds further uncertainty to their growth picture, with roughly 50% of market cap already shaved off for the BPO companies since the fallout -- relative to its 52-week high, Cognizant Tech (
CTSH, Hold) is down approx. 38%, Infosys (
INFY, Hold) down 41.1% and Wipro (
WIT, Hold) is down 38.8%.
There's no mistaking that the global financial crisis has found its way to India's shores at a time when the country is in no shape to weather it. With banks in the USA and Europe struggling to survive, outsourcing is less likely to be a dominant theme going forward. It is expected that the BPOs may cut their dollar revenue forecasts due to a downturn in the U.S. market, which contributes nearly half their revenue. These companies have already said that customers were delaying decisions on new projects in the tough global environment.
The Impact of a Weak Financial Services Sector
Among the major players in the IT Services sector, the percentage of total revenues derived from the financial services vertical is split between Cognizant and Genpact (
G) at roughly 45%, 43% for Tata Consultancy Services (TCS), 35% for Infosys and approx. 25% for Wipro.
Given that a major portion of this exposure (more for the application outsourcing firms and less for the BPO firms) can potentially come from discretionary software development and other projects, the concerns raised about the negative impact of further tightening of bank IT budgets in 2009 is justifiable. The attempts by the Indian IT outsourcers to mitigate these concerns by disclosing the revenue mix from the investment banking sector compared to the more secure insurance or commercial banking sectors have been met with tepid responses so far.
