Will small IT firms survive the meltdown?

By P. Vikram Reddy

The first quarter results have been an eye opener for smaller information technology companies. Gone is the euphoria of 2000, when IT and software companies were looked upon as something out of the world and their share prices defied gravitational laws.

These are days when everyone is faced with `ground realities' - where people fear to talk of turnover and profits in small IT companies. Will they survive the `meltdown'?. Will they still be in business once the rough times are over? Will they see better days? These are questions uppermost in everyone's mind. And better days could be far beyond, perhaps 2002 or even 2003!

There was a time when everyone took pride in announcing registration with the Software Technology Park of India-Hyderabad (STPH). In fact, following Union Finance Minister, Mr. Yashwant Sinha's proposals on tax benefits to STPI registered companies, there was a virtual stampede to register before the stipulated deadline.

According to STPH figures, 229 new units were registered during 2000-01 in Hyderabad. Of the total 1,206 units registered till March 2001, only 674 were operational, while 373 were under gestation. There were as many as 159 units which had not executed legal agreements also. This is besides a number of training centres-cum-companies which made merry in the State during the hey days, but have folded up since then.

Reflecting the changing scenario the STPH scaled down growth projections for 2001-02 to about 50 per cent. For March 2001, exports by STPH registered companies were Rs. 1,917 crores, and projections for 2002 March are Rs. 3,000 crores. This is after witnessing an annual growth rate of over 100 per cent during eight consecutive years, before it dropped to 85 per cent in 1999-2000, and 81 per cent in 2000-01.

Against this scenario, last week's projections on IT spendings in India, as released by the International Data Corporation (IDC), India, will be a further dampener for the small companies. The IDC estimates IT market spending in 2001-02 at Rs. 28,698 crores as against Rs. 22,600 crores in the previous year.

From a 37 per cent growth rate during 2000-01, the IDC's projections are 27 per cent for 2001-02, 28 per cent in 2002-03, 29 per cent in 2003-04, and rising to 31 per cent in 2004-05, when it is expected to be of the order of Rs. 62,122 crores. This, of course, sends dual signals for weak and strong companies.

With big players trying their best to corner offshore services business, and billing rates undergoing drastic cuts, where will small companies fit in? Though offshore services are expected to provide a reprieve to IT businesses, for small companies it is still a far cry.

And this is reflected in the first quarter results. For example, Srico Systems which had a turnover of Rs. 137 lakhs in 2000-01, could clock just Rs. 13 lakhs for the first quarter tgus tear against Rs. 24 lakhs in the corresponding quarter of last year. Likewise, Arnit Infotech reported nil income for the quarter (Rs. 147 lakhs), and Rs. 825 lakhs for 2000-01.

Vantel Technologies has shown a meagre income of Rs. 50 lakhs for the first quarter against Rs. 455 lakhs for the year ended March 2001. Similarly, Tanla Solutions could manage Rs. 18 lakhs for the quarter. Zen Technologies reported a total income of Rs. 4.65 lakhs (income from operations being Rs. 29,000), against Rs. 230 lakhs for 2000-01.And most of these companies have paid up equity capital ranging from Rs. 5 crores to Rs. 7.50 crores. There are any number of such companies with total incomes in lakhs. And most of them had gone public during the euphoria!

There are, of course, some doing relatively better, like C. S. Software which has reported Rs. 205 lakhs turnover for the first quarter against Rs. 15 crores for the full year ended March 2001. ICSA (Innareddy Computer Software Associates) has reported Rs. 196 lakhs for the first quarter (Rs. 104 lakhs), as against Rs. 310 lakhs for the year ended March 2001. Bathina Technologies has shown Rs. 282 lakhs (Rs. 154 lakhs) against Rs. 12.69 crores for 2000-01.

There is no denying small companies are bursting. This clearly seems to be a phase of weeding out fly by night operators, and consolidation for others who can survive. Some feel there will be a second round (revival) and that India is yet to see the IT pinnacle. But how many will survive till then? Only time will tell.

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