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Indian IT Sector on Caution due to Indymac bank Closure

July 15, 2008

With the closure of Indymac bank in California, Morgan Stanley has downgraded the Indian IT sector to be cautious. The outlook for outsourcing and tech spending in the US is likely to remain challenging in the coming quarters. Any more events like further bank closures, mergers, or seizures could further aggravate the situation for offshore
outsourcing vendors.

A rising interest rate environment coupled with prospects of an imminent recession is likely to lead to lower P/E multiples, in our view.

Furthermore, specific factors like the imposition of tax rates post F2010 for STPs, the inability of smaller vendors to migrate to SEZs, and rising offshore wage costs due to increasing competition would imply significantly lower profitability.

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