TCS Follows Others In Indicating Slowdown

The near-term outlook on the IT industry has been deteriorating by the day. So far in the month of December, while the Sensex has dropped by 0.49%, the BSE IT index is trading lower by 6.22%. The outlook for the industry has been turning bleak due to the long talked about reduced customer spending and delayed decision making. However, it has worsened on account of delayed deal closures and the negative effects of Hurricane Sandy.

This is reflecting in the doubts being raised over Infosys’ being able to meet its guidance and also Syntel and Hexaware’s downward revision of their own guidance. So, while companies are at a point where they have to ramp their operations up to meet their annual estimates, they are in the third quarter, which is sequentially a weaker quarter.

Q3 has a lesser number of working days because of the global holiday season that falls within it. Since the Indian IT industry depends on the US and Europe for more than 80% of its total revenues, this quarter becomes weaker as compared to the rest of the year. A slowdown in this quarter also occurs out of furloughs. Infosys recently indicated the prospective impact due to increased furloughs and longer than normal furloughs.

TCS had scheduled an analyst meet on Monday, December 17, 2012. Due to concerns over the management delivering a gloomy outlook the stock fell by 2.83% before the meet. The management expressed their difficulties over the near-term outlook and pressure on margins due to the seasonal weakness of the quarter and the direct effect of furloughs on onsite billing. TCS further stated that there was no slowdown in ramp-up of deals secured in H1 and the company was bullish on traditional and discretionary IT spends in H2. However, there has been no drastic movement in the stock price of TCS after that since the announcement was in line with expectations and highlighted no new negative developments than the usual.

While there are several factors affecting the near-term outlook of the industry, investors are now moving their eyes towards IT spending budgets that would be finalised in the beginning of 2013. Developments in IT budgets would indicate the trend for 2013-14 better and would be a major determinant of the outlook of IT majors.

Note: BSE IT Index and Sensex re-based to 1 in the graph