The Hindu : Karnataka / Bangalore News : Coping with the slowdown

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Wednesday, Jul 09, 2008
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Karnataka

Karnataka - Bangalore

Coping with the slowdown

V. Sridhar

Companies that have a stronger domestic presence are better off in
the current uncertain times

Bangalore: It is not as if every segment of the IT business is equally at risk as a result of the downturn. Industry sources say that there is a gradient of risk that increases as the size and scale of a company’s operation decreases. Smaller companies, with a smaller portfolio of clients who are outsourcing business from overseas, are at greater risk as compared to larger companies, who have a “brand image” and can juggle their portfolio of clients better.

Domestic presence

Moreover, companies that have a stronger domestic presence are better off in the current uncertain times.

“Work for domestic clients may offer lower profit margins, but they are at least not as risky compared to clients from overseas,” says an industry source.

It appears that IT companies with a greater exposure to U.S.-based clients and some of the larger European banks are at greater risk.

Why this happened

Fundamentally, the crisis has been transmitted through U.S.-based businesses, which have taken a sudden hit and have had to incur write-offs. It has been due to their exposure to subprime paper or exposure to exotic derivative instruments.

Some U.S. companies have had to revisit their auditors, resulting in sudden revaluations which affects their balance sheets. This, in turn, affects their future business potential, especially when they have had to infuse fresh capital.

Risks

Rostow Ravanan, Chief Financial Officer, MindTree Consulting, warns that Indian IT companies, under pressure to boost their balance sheet, may undertake greater risks in exotic derivatives. “I do not think they can pull it off. If they cannot, the solution may be worse than the problem they are trying to address.”

He feels that the “one good thing” in the current situation is that companies are not trying to undercut prices.

“That would really hit the entire industry because long-term profitability may be affected.”

He says that the current slowdown may spark off a wave of consolidation in the industry with smaller companies being taken over by larger ones in some areas.

More vulnerable

Mr. Ravanan says that companies which are doing “pure body-shopping are more vulnerable.”

Those in the ITeS space with low levels of value addition, like in voice-based services, are at greater risk. In the low-value lines of business in the BPO space, companies may find it difficult unless they build large volumes and have a great degree of operational efficiency.

But Mr. Ravanan says: “This means sweating the assets and running multiple shifts like a factory, which is not easy in a people-oriented business.”

Establishing a new facility requires a lead time of at least 15-18 months. Companies need to forecast accurately and if they guess wrong, depreciation costs start kicking in while returns on investment don’t.

Even recruitment requires a lead time for training and preparing recruits. But if projects do not materialise, then there is no return on investment. Uncertainty is the biggest challenge in the days ahead.

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