SOURCE: MoneyControl
DATE: March 5th, 2010
SOURCE LINK
There has been small uptick in the income tax (I-T) rate, which IT companies will have to pay next year because of the Software Technology Parks of India (STPI) clarification. However, I-Gate founder and CEO Phaneesh Murthy is optimistic about IT sector’s growth. Speaking to CNBC-TV18, Murthy said IT companies can expect 5-8% sequential growth in the first three quarters of 2010. He is comfortable with the current pricing level, which he felt would protect margins.
Speaking about the US, Murthy said the country is unlikely to see a double-dip as spending revival was broad-based. He also felt employment level should start picking up in the US.
However, he is sceptical about Europe’s growth in 2010.
Below is a verbatim transcript of an exclusive interview with Phaneesh Murthy on CNBC-TV18. Also watch the accompanying video.
Q: What is your sense—are things alright or any sign of trouble with volume growth for the IT sector?
A: I actually think we are coming out of the recession at what I would call a scorching pace. There are four-five trends which are happening and because of that the base is been set very high; the first is the rebound in financial services, the second is broad base increase in IT spending, the third is the fact that there is significant pent-up demand which has been there for the last 15-18 months because nobody has got what they wanted. The fourth of course is the fact that because of the concerns, which now are probably going away about the double dip recovery, nobody wanted to do any employment. Consequently, outsourcing was the answer and we started seeing the benefits of that, most companies grew 5-7% last quarter.
I anticipate that for the first two-three calendar quarters of 2010 also we will probably see even more accelerated growth rate on a quarter-on-quarter basis. I think I had talked about a 15-17% increase in 2010 over the previous year in terms of the growth of the industry. I probably will want to revise that upwards of 20% now. So I think overall quite positive news for the industry.
Q: When you talk about huge improvement in sequential growth for companies as well, how much of an uptick do you think they can set themselves on to for the rest of this year?
A: I think the sequential growth in my sense it will be probably about 5-8% for at least the first three quarters. After the first three quarters what I anticipate is that either the double dip recession will come in, in which case spending will go down and I do not think that that scenario will actually happen. But because the market will stabilize, employment will start picking up and therefore the pace may come down but for the first two-three quarters definitely we are seeing clear signs of more than 5-7% growth happening on a sequential basis.
Q: Any improvements in pricing that are likely with the kind of volume growth that you are talking about?
A: I think the market has kind of stabilised now quite a bit and because of the stability in the market while I am not necessarily saying that pricing power is there and so on. I think pricing is at a much more comfortable level. We seem to get for the right solutions, the right kind of prices which will protect good margins so, I think 2010 would be a year where you would see pricing compared to 2009, which was a disaster year anyway mildly positive.
Q: Will it continue to be a differentiating year though in that it’s the bigger guys within the IT space who will manage to move in terms of prices and volumes? Do you think this time the midcaps may begin to recover as well by way of business flow?
A: Since the spending rebound is fairly broad base, the bigger vendors have more customers. Therefore, they will see the rebound obviously. Anybody who has customers will start to see rebound. To me the market structure is such that there is a fairly broad based recovery. I think where you will not see growth in companies who do maybe some subcontract work or work through intermediaries. There may not be much of a growth but anybody who is dealing directly with the customers, will start seeing a fair amount of rebound.
Q: What about Europe? It seems to be the problem area from a sovereign perspective and so far it’s lagged the US and its recovery even for large sectors like banks, financial services & insurance (BFSI). Do you see Europe picking up majorly in 2010 or will it continue to be a laggard?
A: I do not hold out too much hope for Europe. The US has come back quite sharply and even the US economy grew at what I would consider at scorching pace for the size of their economy coming out of recession in fourth quarter. Europe on the other hand has fair amount of problems with multiple countries in Europe doing quite badly which is occupying a lot of European attention. With the amount of unemployment, etc. Europe always has been kind of more inward looking economy. I would tend to believe that Europe will not come out with strong growth in 2010.
Q: Have some of the problem pockets begun to recover though for example telecom as a vertical because that impacts a lot of influential names over here whether it is Infosys or Tech Mahindra?
A: I do not know enough about the telecom sector because we do not play enough in it. We do play in manufacturing and financial services. So, I do not have clear trends on the telecom sector.
Q: Are there any fears of protectionism affecting volumes that one should have for 2010 or is that all media talk? It’s not really affecting business on the ground.
A: We are not yet seeing any problems in the US on the ground but I do believe that the Obama administration has a number of agendas on the table, much bigger than this one. By the time they come around to it, I actually also do believe that employment will start picking up in the US. So I am hoping that the talk of protectionism and those kinds of sentiments will start vanishing as employment starts picking up in the US again potentially in third or fourth quarter of this year.
