Fingers crossed

After the first-ever downgrade of US credit rating, concerns regarding the possibility of a double-dip recession in the world’s largest economy are on the rise. This comes on the back of the sovereign crises in the euro zone, where economies of countries like Greece and Italy are in the doldrums.

These events are likely to impact India’s major export-oriented sectors, especially information technology and, to some extent, pharmaceuticals, as the US is their major market, followed by Europe.

Som Mittal, president, Nasscom, says: “We are in a wait-and-watch mode right now, as we do not know where the equilibrium will be. We have taken a moderated growth of 16-18 per cent for industry for 2011-12. It’s too early to comment on the long-term impact.”

The top management of India’s second-largest IT services company, Infosys; is hopeful that things will not be as bad as it was in 2008. Says S Gopalakrishnan, MD & CEO of Infosys: “It is very early to say how this will affect the IT services industry and what will be the consequences. It is also very difficult to say at this point whether this will affect the private sector spending in the US. But, businesses are better off today to handle another recession, because they recently experienced one and they have that knowledge.”

While extending the government’s support to the IT sector, Sachin Pilot, minister of state for IT and communications, says: “There is no need for Indian IT companies to press the panic button right away. They should wait and watch how the situation plays out.” He adds: “It’s one of the flagship industries and the government has always supported the IT sector and will continue to do so.”

On the impact of the US event on hiring, Uday Sodhi, CEO of hiring firm, Headhonchos.com, says: “In the April-June quarter results, the IT companies had given a relatively conservative guidance, both in terms of growth and hiring. I don’t foresee a drastic cut in hiring in the July-September quarter. It will take at least 60 days for companies to gauge the actual situation and how they plan to react to it.”

Should things turn for the worse, analysts say the IT services sector, which gets 60 per cent of its revenue from the US, could be hit. They believe deterioration in the US economic climate will lead to shrinking IT budgets of key clients, as well as renegotiation of contracts by US clients, which will hit the revenue and profit growth of Indian technology players. Players with relatively high exposure to discretionary spending business (such as Infosys, HCL Technologies) are likely to be hit more, as clients tend to postpone discretionary spends in recessionary periods. Also,

IT players may not bag large deals, as clients may look at splitting these deals to extract better pricing.

There is a positive side. Experts believe there are visible long-term gains as well, as US companies will have to turn to technology to cut costs and drive profitability. Sunil Goel, director at HR consulting firm GlobalHunt, says: “As companies in the US plan to cut spending, they may move some work out to their captives in low-cost destinations like India.”

A window of opportunity for tech players could be to drive up innovations that will help clients make their businesses more efficient. They can propose varied solutions on cost reduction, globalisation, working capital (cash flows), virtualisation and consolidation, new product introductions, quick-payback projects and so on.

On the other hand, any correction in pharma stocks may not be significant. Analysts feel it will be the last sector to get impacted by any slowdown. It is because the consumption of drugs does not get affected by the macroeconomic scenario. Ambareesh Baliga, chief operating officer at Way2wealth, says with the recent US downgrade, the markets will see substantial correction and all sectors, including pharma, will feel the impact.

If the past is any indication, the impact on pharma stocks is likely to be less. In the last major correction seen in the markets starting January 2008, till October 2008, the BSE Healthcare index fell 39 per cent, compared to 64 per cent decline in the BSE Sensex. And, recovery has been much faster.