Weak demand, a concern for IT sector – Can impact the Indian GDP

IT sector contributes to 12% of GDP and it has good growth in India

However, the second half of this fiscal year has a weak demand. This may put some pressure on IT sector in the near, considering their higher current valuations (The process of determining the current worth of a company.)

TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra — along with some of their mid-tier counterparts such as Hexaware Technologies, Infotech Enterprises, KPIT Technologies, Mindtree and Persistent Systems has earned healthy returns in 2013.

Economy

Source: Economic Times

A gradual renewal in the outsourcing demand in the US and the European market helped Indian IT players to resume on the growth path.

A sharp fall in the rupee against the major currencies during the first half of the fiscal further boosted the top line growth and operating margins.

However, the December and the March quarters are traditionally weak for IT companies due to the festival season and the financial year for many of the client firms to ascertain IT budgets for the next year. IT players naturally report a sequential volume growth of 1.5-3% during this period, compared with more than 3% increase in the first two quarters.

As seen in the December quarter, the rupee has more or less stabilized on an average. Some of the currency market observers have predicted this trend to continue in the remainder of the fiscal.  If that happens, India IT players will not be able to enjoy higher top lines (sales), unless a major depreciation in the rupee takes place. Both these factors are likely to curb the pace of growth in the later of year 2014, which may impact valuations in the near term considering the facts that valuations have risen at a faster pace in recent months.

For more info please check out Economic Times Dec 31st 2013

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