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IT companies face a telecom lag
Published on 16 Feb. 2011 11:44 PM IST
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The telecom vertical is the only major business segment for IT majors where growth continues to slacken in the post global recessionary phase.
The third quarter results for IT majors indicate that while major segments including banking, financial services and insurance (BFSI), manufacturing and retail, have bounced back, the same does not hold true for the telecom vertical. For instance, for TCS, telecom contributed 17.3% of total revenues in the third quarter of the previous financial year, while for this financial year the share dropped to 14.2%.
For Infosys, the telecom revenues fell 4.4% to Rs 887 crore on an annualized basis for the quarter ending December 2010. On a sequential basis, telecom revenues fell 4.3%. On the other hand, the growth rate in the corresponding period for BFSI was 29.67% and 7.1% respectively, and for manufacturing it was 19.6% and 8.6%.
Srishti Anand, IT sector analyst at Angel Broking, said that in the biggest telecom markets of US and Europe the telecom infrastructure has essentially been built out. The largest IT outsourcers including telecom equipment manufacturers Avaya and Cisco, as well as service providers like AT&T and British Telecom, have a majority of their operations in more developed markets.
This means that most telecom spends are towards operational expenses, not capital expenditure. Therefore, the IT work being outsourced by the telecom sector is more of maintenance work as opposed to high value contracts. Also, China, which invested heavily in network upgrades in 2009, has completed its 3G rollouts.
Analysts say that the US and European companies looking to expand operations in faster growing emerging economies like India have slowed down capex as the stagnation in developed markets has affected cash flows. And domestic telecom service providers in developing markets who are in expansionary mode do not place billions of dollars worth of IT outsourcing orders like the major global corporations do. The worldwide service provider capex declined 5.3% in 2009, and is estimated to have declined another 3% in 2010, according to market research firm Infonetics Research.
Siddharth Pai, managing director-TPI India, said that the telecom sector has a distinct cycle of boom and bust.
“These cycles are driven by regulatory or technology changes. There have not been any significant developments in either of these fronts thus leading to lower telecom spends,” added Pai. The 1996 US Telecommunications Act and the transition to 3G technology in developed markets were some drivers of telecom spends in the past.
IT companies that have a larger exposure to the telecom segment have also performed poorly as compared to peers. Wipro, which has a relatively large telecom exposure, has been the weakest performer amongst the top tier IT companies, while in the mid-cap space Tech Mahindra and Subex that have a large telecom exposure have recorded subdued results.

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