American companies hit by the sub-prime crisis are revising their technology spending, which in turn has forced Indian companies to revise their quarterly earnings guidance.
On Friday, Kanbay, an Indian IT company that was earlier acquired by Capgemini, said that business in the second half of 2007 and for 2008 will be weak because of the sub-prime crisis. Earlier, WNS announced a loss of business from First Magnus Financial Corp, an US-based mortgage company.
"In an uncertain situation like this, companies do not outsource," says Avinash Vashishta of investment advisory firm Tholons Inc, which also advises US firms that were planning on offshoring to India.
US financial services companies, including banks and mortgage finance companies, are learnt to be cutting back on IT spends predominantly due to increasing defaults in the sub-prime market, according to industry experts.
The outlook for the US economy has also added to worries about the ability of US companies to continue with their IT spends at current levels. Analysts have cut the GDP forecast for US for the current year, as talks were gaining ground of the possibility of the economy getting into a recession next year.
"There is a 30 per cent chance of the US economy getting into a recession," said Adrian Mowat, managing director, Chief Asian and Emerging Markets Equity Strategist, JP Morgan, told reporters in Mumbai last week.
Analysts felt that whenever there is a possibility of a recession in the US economy, IT spending is the first thing that financial services companies cut back on. "During the dot com bust in 2001, companies in the US cut down on their IT spending," added Mowat.
"Companies will be hurt by the collapse of the US sub-prime market as financial services companies will cut back work," said Vashishta.
Spending on IT by companies in the banking and financial services sector could also reduce significantly and the impact could be felt over the next six to twenty four months depending on their exposure to this segment, analysts said.
While there are no figures available on the extent of outsourcing work undertaken by Indian IT companies, Indian companies since the Y2K boom have been predominantly eying banking and financial services market. The collapse of sub-prime mortgages has made lenders unwilling to provide credit, hurting companies' outsourcing plans.