Call it collateral damage or a bolt from the blue. The fact is that the US financial meltdown will have a long, lasting and potentially damaging impact on the $50 billion Indian IT industry. Companies that bet heavily on banking and financial services tasks will find no place to hide while others would be pressed hard to look at non-banking verticals to keep the business afloat.
That we are in for tough times can be gauged from Nasscom's downward revision of growth forecast for the sector and also from the fact that about 30-35% of the work Indian majors do is related to the beleaguered banking and financial services domain. In fact, fiscal 2009-10 will be a critical year for Indian IT companies. While there might be some companies which can absorb the shock, many small IT companies which pin on one or two clients might not be able to sail through. Analysts predict that the after effects of the subprime crisis of 2007 and the Wall St meltdown will continue through 2009 till 2010, when financial majors become stable. Till then, we might see salary cuts, single digit hikes, unoptimised employee layoffs and flattish sequential growth all through 2008 till mid FY 09-10. "De-risking their investment portfolios from the dollar should be the immediate concern of Indian IT majors right now. I see a sub 5% quarter-on-quarter growth for Indian IT companies at least for the next eight quarters. They should also come out in the open and give their revised guidances rather than putting up a brave face in front of the shareholders all the time," says Hari Rajagopalachari, India Leader for IT practice at Pricewaterhouse Coopers (PwC). IT companies were unavailable for comment citing silent period requirements prior to the upcoming quarterly results. Says Rajiv Mehta, IT sector analyst at India Infoline: "I foresee an almost flattish growth for IT majors like Infosys, TCS, Wipro and Satyam in Q2 and Q3. There could, however, be about 4% increase in Indian GAAP numbers. But this would just be a technical eyewash as the rupee has lost almost 3.4% in the last three months. In real terms there is no huge additional business coming till at least Q2 of FY 2010." Nasscom has already said that it may downgrade the exports earnings guidance. "It's clear that the financial crisis has impacted the industry. We have already lowered the growth rate target from 30% to 23-24%," Nasscom president Som Mittal said this week. Generally, second quarter is the strongest for the IT companies. But this second quarter will be the weakest one in many years, say analysts. Harit Shah, analyst at Angel Broking said: "We see a flattish 3-5% revenue growth that too on the back of dollar appreciation. Net profit growth might not cross the 16-20% range for the next two quarters. FY 2010 will also be a tough year as seeing the current levels, the rupee might not depreciate any further thus negating any currency gains. No huge business is expected to come as yet." The Dollar Factor When the rupee played hardball with operating profit margins of many IT companies last year, they took a different call. The Indian IT majors had started concentrating on markets like UK and Europe after burning their fingers in the severe dollar depreciation last year. But now the Europe foray strategy seems to be failing. With a global financial downturn, the pound and the euro have also fallen against the dollar. The reason behind this is panic selling by FIIs (Foreign Institutional Investors) as they lose confidence in the global markets. The panic selling on large European exchanges like the London and Frankfurt has resulted in demand for the dollar against the pound and the euro. This has resulted in a sharp fall in the value of those currencies leading to a decline in operating profit margins of IT companies exposed to pound or euro revenue. Similar to a fall in pound and euro against the dollar, the rupee has also seen a sharp fall because of the fall in Sensex from above 20,000 levels last October to around 13,000 now. For instance, Tech Mahindra has a major dependence on one client - British Telecom. Almost, 72% of Tech Mahindra's revenues come from Europe. HCL technologies has about 30% exposure to UK and Europe revenue. Infosys and Wipro, however, have a 27% and 24% exposures to Europe revenue, respectively. Mid tier and small IT companies also face a challenge. Says Sanjay Mehta, CEO, MAIA Intelligence, a business intelligence software company focussed on domestic market: "Some small IT companies with a heavy dependence on one or two US-based clients are on the brink of shutting shop. Many small IT companies used to survive because of sub-contracted IT work from large companies. But with clients going bankrupt, the cash flow pipeline is cut, leading to panic. In these scenarios, de-linking from dollar and focus on domestic IT market will be a better bet." And the dollar is not going to stop swinging anytime soon. Says Mr Rajagopalachari of PwC: "When the $700 billion bailout is passed, we might see an inflationary trend. The $700 billion is backed by no assets but just paper. This will push inflation and a decline in dollar. And this might again lead to a rise in interest rates in the US to control inflation which might again increase the dollar rate. Thus we might see the dollar hovering between Rs 41-47 range in the next 18 months." Inflation coupled with the financial crisis will severely dent festive shopping. The Christmas and Thanksgiving shopping season in the US might not be as exuberant. This means lesser seasonal business for Indian BPOs and lesser collection and sales processes from retail giants. Vendor Consolidation As new organisational structures of the i-banks emerge, the IT sector might start seeing renegotiation of contracts and vendor consolidation. The renegotiation will be at lower price but volumes might grow suddenly for one vendor and might vanish for another. All top Wall Street banks like Citibank, Wachovia, Lehman Brothers, Goldman Sachs, Merrill Lynch, AIG, Bear Sterns, Morgan Stanley and Bank of America outsource to different Indian vendors. Lehman Brothers, Indymac, Bear Stearns and a few others have filed for chapter 11 bankruptcy, thus cutting off revenue flow for vendors. Others like Wachovia and Merrill Lynch have merged into Citibank and Bank of America thus putting a question mark on future revenue flows from these clients. But an official from Merrill Lynch said that since both Bank of America and Merrill Lynch have many non-overlapping businesses we might not see 100% consolidation. Diversifying into new areas will become an imperative for many vendors if they want to pick up these contracts when they come up for renegotiation about twelve months down the line. Surviving The Crisis There are several strategies that companies can adopt in such times. For instance, companies which have forayed into the domestic IT market will be at an advantage. Moreover, investment surplus economies like Russia and West Asia will be attractive destinations to make revenue portfolios risk free. Asia Pacific economies like China, Singapore, Indonesia, Malaysian and the Philippines are other good sources of revenue steady clients. On the manpower front, demand for executives adept at managing risk and predictability of cash flows with shorter payback periods will increase. Currently, not only IT services companies, the product companies are also in for a tough time. Says Kunal Gupta, founder director of Mount Talent Consulting, an HR consulting company for IT product hiring: "Overall there is a definite decline of around 40% in the hiring requirements compared to last year. Bench hiring is almost negligible now." New service offereings will have to be looked at to de-risk portfolios. Bankruptcy filings in the US have opened a large amount of outsourcing work for LPOs and other companies. For instance Indymac (an ex-client of EXL) has selected First American as its foreclosure and bankruptcy process outsource provider. Then there are other software which help 'rationalise' salesforce. Adds Sanjay Mehta of MAIA Intelligence: "With BI software, one can determine the productivity of each team and individual in a company and thus optimise its sales force. One can also see cash flows and leakages in between and fill them." Other new processes like loan default, collections, risk analytics and credit card collections might help both the IT and BPO companies. Says Convergys (Gurgaon) recruitment director Ashutosh Sinha: "The financial downturn has resulted in many new processes for us. One such process helps people in the US who are having difficulty paying back their mortgages. It includes advsising and risk profiling." Rationalised and optimised recruitment and organstional restructuring will also help. Hiring young engineers and keeping a lean bench will also be needed. Companies will look to enhance their productivity under pressure. Employees can expect single digit or negligible salary hikes in the coming fiscal. More programs like on campus training will become a norm as companies look to cut training budgets. Acquisitions to bolster new IT offering could also be a way out, like at present HCL technologies is close to acquiring Axon Group, a UK based SAP consulting player. A drop in valuations will make many companies look attractive buys. However, PwC's Rajagopalachari cautions, that "a buyout should not be to purely drive topline growth. It should bring new steady clients of a strategic nature. It should open new lines of service. BPOs should try and diversify into newer domain competencies through buyouts. It can also serve as a mechanism for derisking cash flow portfolio." There is some optimism, however, in long-term projections. Says Partha Iyer, vice-president and regional research director, Gartner India: "In the long run, there will be a greater propensity to offshore as the cost pressures increase. It will further drive the growth of the sector. Indian providers have already built up credibility, so clients are increasingly going to look to them for their projects." But it could take anywhere between 18 and 24 months for businesses to stabilise. Companies which are capable of rejigging their portfolios and making the right bets on new businesses will see their strategies paying off. For others, there may be little option but to shut shop. IT companies which are dependent on financial services firms in the US and elsewhere are feeling the aftershocks of the wall street crash http://economictimes.indiatimes.com/US_meltdown_to_have_lasting_impact_on_Indian_IT_cos/articleshow/3557955.cms Large desire is endless poverty. --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
