Indian IT cos face stiff challenges with project cancellations

Source: TheEconomicTimes
Indian IT firms are staring at significant challenges with price cuts (from clients’ end), project cancellations and ramp-downs, according to a recent India Infoline report.

While in the near term, the depreciation of the rupee is a tailwind, worsening macro indicators are yet to show any signs of bottoming out. "Unemployment in the US is at alarming levels and is still growing. Earnings downgrades at major clients have been substantial in the recent past. Current year earnings estimates were cut by 20%. Since then, they have been cut by a further 40%," the report added.

Infosys (down 1.9% at Rs 1207.65), TCS (down 3.7% at Rs 462.80), Wipro (down 2.4% at Rs 202.20), HCL Tech (down 4.8% at Rs 95.10) and Patni Computers (down 2.8% at Rs 94.95) were being sold heavily by investors. Tech Mahindra was trading 1% higher at Rs 251.15.

After proposing to restrict H1B recruitments at firms receiving TARP funding, President Obama had proposed to limit tax breaks to firms engaged in outsourcing.

"This, in our view, will have minimal impact on IT services vendors, as current tax-breaks are anyway minimal. Further, lack of clarity and practical limitations on this measure’s implementation limit its effectiveness in creating more domestic jobs at the expense of offshored jobs," the India Infoline report said.

Furthermore, the brokerage is not expecting growth in offshoring in FY09. Given the likely short-term nature of the tax-breaks (the previous AJCA-2004 repatriation tax break was for a period of one year), linking the benefits to incremental offshoring could even prove completely ineffective, notwithstanding its popular appeal, the report added.