Sep 19, 2008

Business - India;Software majors look for gold in the rubble

HYDERABAD/ BANGALORE: Doomsday predictions notwithstanding domestic IT companies are hoping to dig for gold in the rubble from the collapse of some of the biggest financial giants in the US and perhaps in other regions that could follow.

The global financial crisis they believe could in fact result in bigger volumes of IT outsourcing they believe as the banking, financial services and insurance (BFSI), majors are forced to cut costs and improve efficiencies.

For instance, Vineet Nayar, CEO of HCL Technologies Ltd, is looking at capitalising on the “zones of frustration” of the IT clients.

That is what the company had done during the 2000-01 dotcom bust.
“We believe in converting threats into opportunities. During the previous slowdown also we did the same, we will do it again. In my view, 2008-09 will be a watershed year for the Indian IT industry, where we will see volume surge, and tech companies offering new services and entering new geographies,” said Nayar.

Srinivas Vadlamani, chief financial officer (CFO), Satyam Computer Services seconds that. The contrarian theory will come into play the same as in 2000-01.

“This situation is similar to what happened then. Though the immediate revenues had dipped due to the trouble in the US market, subsequent years saw volumes increasing and the growth coming back with a vengeance,” he said.

He is already sniffing opportunity in BFSI, which has been most hit by the current macro economic environment.

“BFSI is one of the biggest spenders on IT. Going by our earlier experience, once the trouble settles down the sector would spend more on putting the systems back on track. We see this as an opportunity,” he added.

Nayar also foresees outsourcing to only grow as companies worldwide try to reinvent their businesses to match the current milieu.

“While there has been no drop in our business, we have seen our customers reworking their contracts. Earlier, they were only looking at reducing operational cost, now they want to cut business costs - like reducing inventories, receivable days, etc,” he explained.

Infosys CFO V Balakrishnan, however, sees opportunity coming from more fundamental aspects rather than the immediate situation in the BFSI space.
“We are not working in a constrained market. The business potential is still huge as we (Indian IT companies) are only servicing 5% of the $800 billion global market,” he said.
Industry watchers too appear to back these optimistic readings of the situation.

In a report some time back, Edelweiss analysts Viju George, Kunal Sangoi and Nikhil Chakrapani said the next financial year could be a good one in terms of volumes even if incremental pricing trends downwards.

“This is because the slowdown is forcing offshore outsourcing,” they said.
However, the trio feel that a large part of the benefits from a slackened global economy may come only in the next fiscal.

“Delays and longer than usual deliberation of deal closure (especially large ones) will mean that the bulk of what the slowdown will induce by way of outsourcing may not occur in FY09 as much as in FY10,” George, Sangoi and Chakrapani wrote in their report.

But then even as the tech majors paint an optimistic scenario, the frowns are nevertheless evident particularly where sustaining their current margins is concerned.
According to some industry insiders while some IT majors have priced aggressively after the late decisions on IT budgets by American and European clients earlier this year, those vendors undercutting to bag new business could end up in dire straits in the current scenario.

One fallout of this trend is already being seen in pressure on cost reduction particularly employee compensation.

Though there may be some headroom for companies to take a further pricing cut, they can still maintain margins, felt Sasken Communications Ltd’s chief marketing officer Swaminathan Krishnan.

“That is because eve as rate per hour has dropped, we have seen higher squeezes in cost per hour because of a correction in compensation,” he added.

But then Infy’s Balakrishnan warned against companies commoditising their services failing which they will not be able to maintain their margins.

No comments: