After weathering a tough year last year, India's flagship IT companies are facing the specter of a US economic slowdown squeezing profits as they start unveiling earnings this week, analysts said.
Software firms such as Tata Consultancy, Infosys and Wipro were last year roiled by the rupee's steepest appreciation against the dollar in three decades, surging wages and real-estate values and the end of a tax holiday.
Now come possible cutbacks in the information-technology budgets of US clients preparing to tighten their belts as a housing slump, tighter credit and high energy costs take their toll on the world's biggest economy.
"The negative view is that US corporate budget growth will slow and we won't see as much demand for outsourcing and offshoring as we saw last year," said Suveer Chainani, technology analyst at Macquarie Capital Securities in Mumbai. "Most people's perception is drastically negative."
Clues to the extent of the fallout may surface when Infosys, a Bangalore-based pioneer of the software industry, kicks off the corporate earnings season on Friday by announcing its fiscal third-quarter results.
Investors hammered the shares of IT companies last year as the bad news kept piling up. IT stocks trailed the benchmark Sensex by more than 40 percent last year and no relief is seen by analysts this year.
"The rising risk of an IT spending slowdown raises the hurdles on a 12-month view and we remain underweight Indian tech," investment house CLSA said in report.
"Barring periodic deviations, we see absolute long-term annual stock returns of 10 [percent to] 12 percent, down from the heady 30 [percent to ] 40 percent of the past," CLSA analysts Bhavtosh Vajpayee and Nimish Joshi said in the report.
Sentiment remains negative although IT firms have remained profitable. TCS, India's biggest software services exporter, reported a second-quarter net profit jump of nearly 23 percent to 12.51 billion rupees (US$318 million).
Infosys saw its profit in the quarter ended September 30 rise 18.4 percent to 11 billion rupees. Wipro's profit climbed 18 percent to 8.237 billion rupees.
The US is the biggest market for Indian software and service exports which jumped 33 percent to US$31.4 billion in the year ended March and are forecast by the industry grouping Nasscom to reach US$60 billion by 2010.
The industry has been at the forefront of India's strong economic growth, benefiting from work farmed out by cost-cutting global companies to take advantage of India's vast engineering talent pool and low labor costs.
But last year took the sheen off the sector as it reeled from a 12 percent rise in the value of the rupee against the US dollar, an 18 percent jump in wages and increasing rental costs and real-estate valuations.
The government also last year extended a 13.3 percent tax to export earnings. The tax previously only applied to local profits.
The rupee's rise caused the biggest hit, reducing the local equivalent of every dollar earned by an industry whose expenses are almost all incurred in rupees.