On the sidelines of the JP Morgan IT Conference, Bhavin Shah of JP Morgan says that IT spending in the US may slow this year, but this will not really impact outsourcing.

He see a lot of potential in chip designing and solar energy going forward, and believes that one will continue to see a good pricing environment for tech companies. However, not many returns are seen from incentives to semiconductor makers.

Talking about Indian tech majors, he says that TCS' Q3 performance was a stunner.

Excerpts from CNBC-TV18's exclusive interview with Bhavin Shah:

What is the outlook for 2007 as you kick off your Asia Pacific Tech conference, particularly on the software services front?

Generally, the outlook for tech sector continues to be good, especially when one looks at the overall unit demand for technology products. If you go back and focus on the services front and follow the US corporate profit trend, then yes the IT spend might slow a bit from last year, based on relationships we find between profits and IT spending. But the outsourcing is unlikely to have any impact on that and the room for growth and outsourcing continues to be strong.

The trends, that are in place not only from the US but now increasingly from other parts of the world, seem to be intact. So we continue to see a good market for IT services as well as for technology in general.

From what you are speaking to your clients over there, what is the sense you are getting both in terms of demand for outsourcing now and how much elbow room do these big tech companies have in terms of pricing?

Pricing is a function of two things - one is the ability to pass on the wage increases and secondly the demand environment, and in a good demand environment the companies have an ability to pass on the wage increases, so that demand continues to be robust; many of the companies have built-in contracts, which allow the companies to pass on some of the wage pressures they are facing. We do see a good environment for these IT service companies in terms of pricing.

There is a debate going on in India about a semiconductor policy. You touched upon that theme and believed that it is not a very lucrative area for Indian businesses to go after. What are your thoughts on that and about a couple of listed companies being excited in anticipation of that policy?

We just published a report recently where we have put out a case for arguing against providing incentives for semiconductor manufacturing, especially the big semiconductor manufacturing in India. We believe many countries have tried this route in the past including China most recently, and haven't seen any economic returns coming out of these investments.

The only people to benefit from this investment and government incentives are the semiconductor equipment providers from US and Europe as they sell equipments to these companies. But in terms of benefits to the economy and the country, we see very few.

We see the opportunity suddenly though for India in IC design, in Chip design and for example, yesterday the TSMC, Taiwan's big and the world's biggest semiconductor foundry set up an office in India to serve the Indian chip designing industry. So we definitely see opportunity in chip design and also in the solar energy industry, where India has many advantages. So we do see some selective opportunities.

What exactly do you mean when you say that you like the hardware space better? What sort of stories excite you about India in the solar initiatives?

There are still many opportunities for innovation for solar energy industry. Currently, the solar cells are based on semiconductor technology, but there are opportunities to change the materials that could generate much lower cost and bring down the cost of solar energy. Also, with lot of rural demand for energy, solar energy is ideally suited.

While this industry will be competitive, the growth opportunity is very strong given Indian energy dependence and requirements; we feel it is ideally suited for India. So if the government wants to provide incentive for a new industry to come, then those should go towards solar energy rather than towards semiconductor Fab manufacturing

You might have talked to many US key spenders. What is the sense that you are getting about the guidance that large IT Indian services companies have for the next fiscal?

The kind of companies that are coming to this conference are mostly companies from Asia as well as from Taiwan, Singapore, Korea; not many US tech companies that you might be thinking of are there. You will obviously get to hear a lot more about what is happening to the general tech demand for different hardware products, consumer electronics, handsets and PC and so on.

We have wrapped up earnings. Which ones are the clear stunners this time around?

TCS was a clear stunner. In terms of surprise, they seemed to have made up for the slow growth they had for a couple of quarters, which is remarkable given the size of that company.