Today morning, when I picked up Economic Times, something which was long awaited was there on the front page as headlines – ‘TCS signals hard times, nips staff salaries’. As soon as I read this, I gave a call to one of my engineer friend who is working with TCS and I was amazed to know that they had been already told something on this regard.

Though the cut is marginal (1.5%) and that too in variable pay but it will definitely send a signal to all the employees working in IT industry that the worst is yet to come. Past few months had been the toughest time for IT industry in India due to soaring salaries and downgrading of US economy. IT industry is struggling to maintain the margin but to their despair, the efforts are not showing any results. Quarterly results of behemoth like Infosys, Wipro and TCS clearly shows that the top line as well as bottom line is constantly receding. We can expect a complete picture once the full year results are published after March 08.

The major hit on IT industry is due to recession in US economy as US is the prime source of business for them. Sub prime crisis has affected US economy very badly which is further darkening the future of IT industry. Secondly, dollar is weakening against rupee consistently and a correction in future is not expected which is another major issue for outsourcing industry. Last but not the least, as Indian economy is growing there is manpower crunch and salaries are soaring like never before. In the wake of all this, to maintain the margin is biggest challenge for IT industry. I personally feel that the margin for IT industry in India are bound to come down as nowhere in world, the margin for this industry is ~ 30% where as here we maintain it at that level. Across the globe, IT industry are maintaining much lower margin and we will settle somewhere around ~ 15% as we are not an exception to the thumb rule.

All said and done, shareholders feel betrayed when they see their all time favorite stocks tumbling down. Same is the case with Infosys, which used to be favorite stock on Indian bourses. The stock has come down drastically in the last year and the investors’ confidence is also moving southwards. To avoid the impact of US recession, the option available to IT industry is that they should diversify the risk and grow geographically in European locations and countries like China. This may provide some respite to the bleeding margin and may also provide some upgrading to the top line and bottom line as well.

One thing is sure that the road ahead is not easy for IT industry, though it is too early to predict something concrete. My suggestion for stakeholders is that they should exit IT stocks if they are getting a good opportunity to do so. This financial year was a learning time for the IT industry and coming year will not see any sudden change as they must have done their homework well for future. Margins are expected to fall further but it would not be as steep as it had been last year. Coming back to the headlines of Economic times, rest of the players in IT industry are going to follow the TCS way as cutting the salary was just a matter of ‘who first’. TCS has paved the way for other smaller players in IT industry who are struggling to maintain the margin.

(The views expressed are personal. For any queries, you may write at amitkhandelia@yahoo.co.in)

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