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Indian IT firms see war denting biz in short term

Anshuman Daga in Bangalore | March 31, 2003 17:02 IST

India's software industry, riding an outsourcing boom, expects business to dip in the short term as prospective customers delay making decisions amid uncertainties thrown up by the US-led war in Iraq.

But analysts expect the export-led sector to continue growing robustly in the long term as a protracted war amid a global economic slowdown could put more pressure on firms to outsource to cheaper locations to cut costs.

"Since the Iraq conflict flared up, visits by a few customer prospects have got postponed," said S Janakiraman, president of technology business at MindTree Consulting, a small exporter.

Said K Thiagarajan, senior vice president at Satyam Computer Services, India's fourth largest software exporter: "If governments begin to issue travel advisories, then this will hit customer travel and delay decision-making."

Indian companies, which draw from the country's vast pool of low-cost engineers, are emerging as one-stop shops for services ranging from software to back-office functions such as payroll processing and customer support.

They execute much of the work from ‘offshore' sites in the country, delivering services on high-speed telecommunications links, and also at overseas centres close to clients' offices.

The sector, which earns about 60 per cent of its export revenue from the United States, is the fastest-growing segment of Indian exports, seen growing by around 30 per cent to nearly $10 billion in the year to March 31 to a fifth of total exports.

But analysts expect India's main software companies to issue cautious earnings outlooks for the April-June quarter as a result of the war in Iraq.

Brokerage DSP Merrill Lynch said in a recent report that a prolonged war could hit volumes and trigger pricing pressures in the first half of the financial year starting April.

"New project starts, ramp-ups are being delayed further due to the Iraq situation," it said.

Technology bellwether Infosys Technologies, rated as the top sectoral pick by many analysts, kicks off the country's quarterly earnings parade on April 10.

Investors are also growing nervous. Bombay's information technology index rallied nearly 7 per cent since the war began, rising near seven per cent from March 19's close to March 24's intra-day high, but then pared gains by Friday's close.

But the industry's long-term prospects remain bright, analysts said, despite delays in decision-making by prospective clients since it gets about 80 per cent of its total business from old clients, including about 200 Fortune 500 giants.

"There may be some minimal disruptions in sales cycles, but if the pressure on costs increases due to a long war, this will actually give a big push to cheaper offshoring," said Partha Iyengar, research director at Gartner India.

"Much of the growth for Indian companies has come at the cost of a loss of business for US IT companies."

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