iGATE seeing some project cutbacks, cancellations 2008-07-09

Phaneesh Murthy, CEO of iGATE said that his company has seen some project cutbacks and cancellations. Since the budgeting season in US is drawing near, he estimates that this may not be a positive year; he has seen weariness in the tech budget allocations in the US. The actual budget spent in 2008 will be lower than what was budgeted, Murthy added. The offshoring share may become larger even if budget doesn't, he said. According to Murthy, the volume growth is likely to be affected more than pricing.

Excerpts from CNBC-TV18’s exclusive interview with Phaneesh Murthy:

Q: How is it looking from the US now? What are you hearing at the trenches - things are okay or this latest leg down from the financial services sector there again is raising some worries?
A: I think I do have some worries, the most conservative estimates in the financial sectors charges about USD 480-500 billion and we haven’t seen all of those factored into all of the companies statements yet. So there is some problems. The bigger concern is that we are going into a budgeting season in the next 2-3 months for 2009 Calendar Year in the US and whenever you do budgeting in a bad time, there is hardly any money kept for discretionary projects. So my concern is that it could actually turn out to be not so positive as a year because the first couple of quarters normally the January, February and March quarter (JFM quarter) we normally get a release of funds and projects. My concern is that when you are doing budgeting in this environment, that release won’t happen and if things do turn around, my sense is that the earliest will be Calendar Q3 next year, which is about 12 months from now. But things are not looking good on the ground also.

We, in the last three months have seen evidences of cut-backs on discretionary projects; we have seen cancellations on some projects, we have also seen generally more weariness in budget releases. So we have seen some of these things. It is a kind of a mixed bag but overall I would say it is slightly negative.

Q: That is extremely interesting-on two counts there, what is it that you expect to see by way of budget spends this year because most estimated it to be flat or marginally negative. Do you think budgets will be extremely lower than what they were in 2007 and secondly for lot of tech companies we spoke in the first half of the year, they said that the second half is going to be stronger. Do you think that it is going to play out like that?
A: I think the budget actual spend in 2008 will be lower than the budgeted in 2008 and will be lower than 2007 and that is because all of that money is not yet being spent; people are being little cautious and people are being a little weary. I think unless the environment improves and I don’t see any signs of environment improving. In fact if at all I see signs particularly in the financial services sectors that things are getting a little worse and if that environment is getting a little worse, I would argue that going into the second half of the year we will not see those releases of those projects that we were hoping for.

Q: Just to scratch that point a bit further the guidance from a large number of the companies or big companies have been very back ended. Do you think that is at risk given your prognosis of what might happen in the second half of this fiscal?
A: I think it is going to be a little dependent on which companies are working with which customers; people who are working with Bear (Stearns), saw their business probably disappear overnight. After that, the JP Morgan Chase integration. If one looks at companies like Washington Mutual, Countrywide etc - there are lot of companies which either merge with other entities or which have just gone away and in that scenario what happens is that you do face a challenge.

So I think some companies may end up meeting some of its guidance numbers and some won’t because of what is happening with their customers rather than the broader markets. Because I am also hoping that the trends becomes more positive as the environment becomes a little more difficult. In the first 2-3 quarters of the environment becoming negative there is an indecision and once that indecision starts moving to actual action, I am also hoping that the offshoring stuff becomes little larger even if the budget stuff doesn’t become larger.

Q: Where will the pain show up if indeed it is going to be difficult? Do you think volume growth will get affected or prices will get affected?
A: I think that volume growth is more likely to get affected than pricing. We are not seeing as much of pricing pressure and impact on the market. Everybody understands what is happening with the dollar, even if people do not know fully of what is happening with the rupee, everybody understands that the dollar is going through a very bad phase - so there is sympathy on the pricing front. Everybody knows that salaries and momentum is still fairly high in the Indian employment market, so there is sympathy on that side. So I think there is less pressure on the pricing side as of now and I think there will be more of a pressure on the volume side.

Q: For lot of larger companies they might be able to tied over this period because they have seen it before. Would you worry about some of the midcap IT companies that either have high dependence on one client or have a very lumpy earnings performance?
A: I think if at all the only reason to worry about the mid-size companies is their client-concentration. So if they are heavily exposed to a client who is going to go under, something like that could be probably the biggest worry. But otherwise I don’t see more dramatic variations between large and small; it is customer specific and that is the way the market is evolving. If you had the fortune to work with a customer who is doing well, then that is a great news and if you have a misfortune of working with a customer who is going under, then it is a bad news for you.