IT companies cautious on growth, eye M&A

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Pricing environment

Balakrishnan of Infosys said while demand for fee cuts from clients had abated thanks to the economy's limping back to life, the No 2 IT exporter did not see prices going up in the short term as customers were spending selectively on technology.

"You will live on similar pricing environment for some more time till the supply demand situation changes more in favour of demand," he said. "As long as the pricing remains stable, we are OK on the margins."

But a 12% rise in the rupee against the US dollar from a record low in early March could have an impact on profit margins, Balakrishnan said.

Every one-percentage-point rise in the rupee crimps margins by 30 to 50 basis points at top IT firms that bill more than half their revenues in dollars. The companies hedge some portion of their revenue to deal with the currency volatility.

"If the pricing pressure and the rupee rise happen at the same time, then it will be a challenge for the companies," said Rajesh of Sundaram BNP Paribas Asset Management.

Small is beautiful

Indian software firms are looking to expand in markets such as Asia-Pacific and Europe to cut their dependence on the US market, which brings in more than half the sector's USD 60 billion revenues but has been badly hit by economic and market turmoil.

Infosys, which has built up a cash pile of nearly USD 3 billion, said it was looking to buy firms in sectors such as consulting, utilities and healthcare to boost its presence in geographies such as France and Germany, Balakrishnan said.

But the deal sizes would be smaller, with target companies revenues at about USD 400 million to USD 500 million.

So far, Indian outsourcers have shied away from blockbuster deals despite having the required financial muscle and instead focused on acquiring smaller IT divisions to tap opportunities in select areas or geographies.

($1=46.2 rupees)