Thursday, October 16, 2008

Meltdown: How Indian IT can benefit

Pinkslips, dent in revenues, plunging market cap... the effects of the global economic meltdown seems to be disturbing for the Indian IT companies. However, the financial crisis in US, which has dragged down the entire global economy, also has a positive side to offer. As they say every cloud has a silver lining.

While the crisis may seem to be wreaking havoc on IT companies in the short-term, it offers many opportunities in the long-term। Here are seven ways how US credit crunch will help the Desi IT companies.

It's perhaps the best time for Indian IT companies to go for acquisitions. The falling valuation of IT companies is an opportunity for Indian companies to broaden their portfolio. Experts say that US-based IT companies are increasingly looking at cost-cutting to sustain. However, valuations have already dipped by nearly 30 per cent, which has triggered many prospective Indian companies to hunt for acquisitions there.

The recent counter bid by HCL Tech for UK-based Axon, whose acquisition was announced by Infosys last month, highlights the urgency among Indian outsourcers to expand their markets, grab bigger spending clients and beat the US slowdown. Similarly, the latest deal tracker by Grant Thornton, the number of outbound deals was higher than the inbound deals. Till August -- just before the financial market meltdown -- more than 10 per cent of the deals in the M&A space were in the IT sector, as against 3.91 per cent last year.

The acquisitions will primarily help Indian IT companies to expand their market। They will help companies acquire skill sets and contracts and relationships that have higher billing rates and that are more complex value-add services.

What can be a better time to reduce dependence on the US market? All big Indian IT companies get more than 50 per cent of their revenues from the US markets. The financial turmoil in the US is making Indian IT companies look beyond their key market and explore new territories.

Indian IT firms such as Infosys and rival Tata Consultancy Services are rapidly expanding in Europe, Asia, the Middle-East and Latin America to cut their dependence on the United States. In fact, the last two quarters of the leading IT companies have also shown a jump in revenues from other geographies.

The No 1 software exporter TCS is making large investments in Latin America and the Asia-Pacific region, including India। Infosys Technologies too plans to cut its dependence on the US down to about 40 per cent from the present 60 per cent.

Traditionally, Indian IT biggies earn more than 50 per cent of their revenues from BFSI (banking, financial services and insurance) segment. With the global financial crisis, these companies are now looking at other verticals and expanding their portfolio to drive profits.

The recent battle over Axon between Infosys and HCL also shows the Indian companies' zeal to target European markets increasingly.

Analysts expect that over the next couple of months, Indian IT firms may not sign any big contracts in the BFSI sector, but instead they may bag opportunities in areas like retailing, transport, healthcare and manufacturing.

As the industry diversifies, it is expected to see growth coming from unpenetrated areas and verticals। Traction in manufacturing, life sciences and retail verticals helped TCS drive growth in Q1. The company CEO also said that new verticals like retail, manufacturing and life sciences are growing. Satyam has generated some $440 million that accounted for 21 per cent of its revenue from Europe last year.

Many analysts also believe that the global financial turmoil may in a way also boost India's outsourcing industry as the focus shifts towards cost-cutting, making them shift work to cheaper locations.

According to them, existing contracts could continue and outsourcing could be stepped up but there could also be massive restructuring of offshore deals.

The software industry body Nasscom too believes that the financial crisis will lead to more business coming to India. For example, the tremors of job cuts as a result of HP-EDS integration are also likely to be felt the most in high-cost locations. The US is reported to suffer at least 50 per cent of the total 24,600 job cuts announced.

Recently, Gartner too has said that the consolidation among large financial services players such as Bank of America's acquisition of Merrill Lynch and Lloyd TSB's takeover of HBOS will provide huge integration opportunities for Indian IT software companies.

The domestic IT services market has, in fact, been growing at a faster pace than the total IT industry growth. However, the market is largely ruled by global tech players, with IBM leading the show.

So, the US slowdown may finally make Indian IT companies look in their own backyard and realise the latent market potential.

The overall domestic market, comprising hardware, software and services (IT-BPO), grew a 42 per cent in FY2007, and is forecast to reach $23.2 billion in the current fiscal, according to Nasscom. Out of this, IT services such as application development and consulting alone account for $7.9 billion, up from $5.5 billion, last year.

Interestingly, of the $50 billion IT services revenue of companies operating from India, about $10 billion already comes from the domestic market। In effect, India might be a small market in the global IT services context, but it's the third largest revenue generator for IT companies after the US (60 per cent of the total) and the UK (18 per cent).

As the heat of global slowdown spreads, it's time for IT players to modify their recruitment strategies, keeping them in tune with the changing market conditions and demands.

Recently, Microsoft Corp had said that it was reviewing its hiring plans in light of the tough economic conditions, but denied reports that it had instituted a company-wide hiring freeze.

Also, many IT companies are going in for hiring more number of trained manpower, rather than freshers. Recently, TCS, which recruits about 18,000 employees every year, decided to make significant cuts in recruitment patterns to tide over the crisis. The company now plans to hire more experienced candidates rather than go in for fresh recruits.

Wipro too has recast its hiring plans. The company has introduced stringent measures while taking in any fresh recruits. The company has even set up a Talent Quality Group within Talent Acquisition division to ensure quality hiring.

At the same time, Wipro has also started campus hiring in US and UK if certain media reports are to be believed.

The adage of learning from the past mistakes rightly fits here. The crisis at two iconic institutions in the US has brought in the urgent need for greater financial accountability.

So it is time for business intelligence vendors to step in to offer advice on financial regulation. This means more work for tech vendors specialising in the domain. These tech vendors therefore could experience an increase in demand for data management software from financial institutions to monitor their practices.

In fact, a few analysts believe the stringent regulations that will come into the financial sector after the crisis will create massive opportunities for companies specialising in business intelligence.

No comments:

Post a Comment