Monday, March 29, 2010

Business Outlook - Impact of Global downturn/recovery on the IT Sector

The IT sector stocks have been on a sweet spot for some time now. The US markets were improving (or rather showing signs of not going into a depression) and some semblance of business sense were returning. This was getting reflected in the valuations of the IT stocks.
I think the party may be over for the time being. The currency printing frenzy in the US is more than likely to produce high inflation in the US and a weakening of the dollar. This is likely to impact the dollar arbitrage business fairly negatively for these companies.
I have no idea where the dollar-rupee exchange rate will go, but even a 10% weakening of the dollar (around Rs. 40 for a greenback) would mar the prospects of remarkably.
Now, let us think what what these companies can do to fend off the currency challenge.
  1. It can hedge it's currency position (net zero hedge position)
  2. Reduce it's onshore employee strength
  3. Look to increase geographic diversification (spread off into countries like Vietnam, Philippines, Hungary, Romania etc) to contain the employee wage hikes in India
  4. Move to more asset based (more reusable components in service delivery)
  5. Try to get into product delivery as opposed to vanilla ADM (application development and maintenance)
  6. Look for increasing revenue/employee (i.e. employee productivity)
I think there are clouds in the horizon for these companies. Prudent proactive management can stave off some of these concerns. Let us see what happens.

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