Bid Adieu to Slowdown?

The financial scenario in India in the mid 2000 was that of a healthy growth
and steady rise in economic production. Although financial predictions were
skeptical about the years to come in terms of economic growth and market
research analysts predicting the Indian economy to reel under the crash in USA,
in FY 2005-06, India registered a healthy 8.4 percent growth compared to its
previous figure of 7.5 percent in the last FY.

The software sector especially boomed contributing approximately five percent
of the average GDP in 2007-08 rising from the meager figure of 1.2 percent in
1998.

The stage was all set for a take off in terms of economic growth. But it was
here that the crisis came in. The global economy reeled under the effects of a
slowdown in 2009, with businesses in most major geographies reporting a decline
in revenue. A raging sub-prime crisis, infiltration of bad debt, followed by a
resultant credit crunch impinged on the liquidity of capital markets worldwide
and dampened buyer confidence. Obviously, as buyers adopted a more cautious
attitude to purchases, businesses recorded lower revenues and margins.

"Indian businesses were not completely insulated from this global slowdown.
The Indian IT landscape can be roughly broken down into hardware, software, and
services vendors. Of these, services vendors occupy the largest portion of the
pie, followed by software and hardware," pointed out Surya Mukherjee, Technology
Industries Analyst, Ovum India. He also mentioned that all IT services vendors
that operate in India derive a super majority of their revenues from
international markets. For example, Infosys derived almost 99 percent of their
overall revenue from markets outside India in FY 2009, while TCS derived about
92 percent internationally. Obviously, as international clients softened their
buying outlook, vendors were affected to some extent.

Another key factor that affected India-based businesses was a fluctuating
exchange rate which led to non-operational losses. The rupee, which started at
Rs 50 per dollar, climbed to about 52 in March. However, by the end of 2009, it
had fallen to Rs 46 per dollar. Most IT vendors undertook massive currency
hedges to insulate against currency movements, which brought in unexpected
losses or gains depending on the direction of the hedge. For example, TCS took
new hedging positions worth $135 million for the quarter ending December 31,
2009, after having recorded a foreign exchange loss of Rs 113 crore for the
quarter ending September 31, compared to a gain of Rs 84 crore for the quarter
ending June. "IT service providers had to face lowered billing rates, strong
negotiations and sometimes even re-negotiations by existing clients. Moreover,
these rate cuts did not equate to a rise in the volume of deals. An increase in
bench size coupled with these factors adversely affected both the topline as
well as the bottomline of the Indian service providers", said Kumar R Parakala,
Head-IT Advisory Services, KPMG India.

The impact on SPs

While the entire economy reeled under tremendous stress occurring mainly in
the IT and ITeS front, the nation held steady although at a marginal or nominal
positive rate. Soon, the slowdown began to cripple the IT distribution process
with major IT players freezing expansion plans, acquisitions and resorting to
internal retrenchment with new hiring in the IT sector falling. The effects were
too bad on the solution providers (SP) in India. "The solution providers were
affected since people put on hold their expansion plans and, hence, the SPs had
to scale down their growth projections. The payments were also taking longer
than usual to come by thereby affecting the cash flows. Liquidity was further
affected due to tight credit squeeze from banks. Overall, on one side business
was not expanding and on the other funds were not coming resulting in a double
whammy for the solution providers", said Sanjeev Singhal, EVP-Finance and
Accounts, Religare Enterprises.

According to Ovum India, in terms of application and infrastructure
outsourcing, the Indian domestic market estimated at about $3.3 billion in 2008,
grew at about seven percent in 2009. This growth rate is about two percentage
points below its expected CAGR from 2009 to 2014. "Briefly, the global IT
services market including only application and infrastructure outsourcing
recorded a dip in growth rates in 2009, growing at a rate of 4.1 percent from
2008 to 2009. As per Ovum's forecasts, this market is expected to grow at an
accelerating pace from 2010 onwards, touching growth rates of 4.9 percent in
2010 and 6.8 percent in 2012, to finally stabilize around 2014. We expect an S
shaped recovery curve," Mukherjee commented.

However, things did not seem that bad for the SPs in the times of the blues.
Sharing his views on the market trend in the previous calendar year, Kochi-based
Manoj Joseph of Neural Networks said, "The business flow during the slowdown was
more or less steady. The problem occurred in the credit front. We had to extend
the limit and often the clients failed to pay by the deadline. So, in those
times, there was a more of a credit crunch situation occurring rather than
losing business."

Blues over?

Market experts now feel that the economy is heading towards the phase of
recovery and the nation will be out of the blues soon. "The worst is definitely
over. In terms of the IT market, Indian companies are showing positive signs.
The shares of India's largest IT firms TCS and Infosys hit year-high levels
after the announcement of better than expected results. Moreover, revenue
contribution from BFSI which has been the worst hit vertical for some key Indian
IT players increased over the last three quarters," Parakala elucidated. "Indian
service providers are also improving their employee utilization rates, which is
a good indicator of a turnaround. There is a change in the hiring trends.
NASSCOM is expecting an increase in hiring around niche skills and domain
specialization. Shorter decision-making cycles, innovative business and pricing
models and stabilizing volumes are driving this revival in the IT business," he
added.

Agreeing on the same viewpoint, while discussing the market trends, Surya
Mukherjee of Ovum India said, "There are definite signs of a revival in IT
spending globally, which has direct impact on global as well as India-based
services/solution providers. According to Ovum-Datamonitor's Global IT Services
Interactive Model, the global IT services market was recorded at $560 billion in
2009, growing at a rate of 4.1 percent from 2008 to 2009."

Also, the market research agency concluded that in the first half of the
year, about 80 percent of all CIOs polled, reported a flat to declining IT
budget expectation for the next year. However, in the second half of the year,
only 74 percent of CIOs expected a flat to declining IT budget, indicating that
the buyer sentiment was turning more positive as the economic crisis subsided.
"The market right now seems pretty good, growing at a rate of 15-20 percent more
than the last quarter. Especially, there has been huge improvement in the buying
pattern in the corporate and government verticals. The government is now keen on
revising its IT portfolio and upgrade to better systems. The highest growth,
however, has been on the blade server front. This year, I think that the overall
market will be healthy and will grow at a rate of 15 percent," said Pune-based
Shital Nahar of Nahar Integrated Systems and Solutions while speaking about the
market scenario.

slowdown lessons

As the worst phase of the financial nightmare seems to be over, the market
appears to be in an analytical mood, learning from the recession. While SPs
across the nation are skeptical about the ongoing situation, they are now
looking forward to expand horizon, with leading market research agencies
offering an analysis of the learning from the impact.

Targeting emerging markets in the phase of a slowdown is a key finding that
SPs need to explore. Class-B and C markets provide a key opportunity in terms of
market potential during the phase as Class A markets are well saturated.
Speaking over the same in terms of market exploration on the ITeS front,
Mukherjee said, "A majority of Indian IT services vendors are still heavily
focused on the US and the UK. Although US will continue to be the largest market
for services in the near future, service providers would do well to diversify
into untapped and under-penetrated geographies. In particular, markets in
Central and Eastern Europe, Latin America, and MEA should be of particular
interest. In the CEE, Russia and Poland will be the likely hotspots with an
anticipated services market CAGR (2009-2014) of about 16-17 percent. Similarly
in Central and Latin America, Brazil and Argentina will record high growth rates
of about 14-15 percent CAGR (2009-2014)".

Second in the line, it is advisable to maintain ongoing focus on cost
cutting. In recessionary times, focusing on the bottomline becomes critical.
Expanding to lower cost locations will help in

this regard. On one hand, possessing delivery locations in a particular
geography will increase the chances of getting more local contracts while on the
other hand, establishing distributed delivery locations will also help providers
gain access to a global talent pool to mitigate local wage inflation.

Moreover, focus on innovation and introduction of new services is essential
to drive business, be it in terms of product offering, portfolio or enhancing
the business model. Companies would need to focus on newer generation
products/services to cater the market. As lowering operating costs and
restructuring are top priorities for corporations in today's environment,
service providers could create business transformation solutions to attract
clients. "Security and risk management, IT governance and compliance are focus
areas for clients today. Therefore IT companies that build these capabilities
are likely to be preferred. Greater innovation and differentiation in the
marketplace is absolutely necessary in this competitive environment," Parakala
said.

An enhanced set of HR policies along with better employee utilization is
commendable. During recessionary times, it was seen that the IT companies had
significant bench staff. Service providers could follow the footsteps of IT
majors to utilize their bench staff for internal IT projects during the
slowdown. Freshers and college pass out graduates that are easier to hire and
come at relatively lower salaries could be considered as new hires.

Exploring opportunities arising from the domestic segment is another key area
to lay focus on. Domestic IT-BPO is expected to grow at unprecedented rates in
India. "With an increased adoption of IT not only in mid/large enterprises, but
also among SMBs, the domestic market presents a significant opportunity for
Indian service providers," Parakala concluded.

Predictions for 2010-the year ahead

"There is a lot of catching up that is expected to take place in calendar
2010. People would not like to be left behind and, hence, are likely to expand
their capacity fast. The plans which were put on hold will be rolled out faster
than expected. I expect a higher growth rate in at least following three
sectors-the financial services market, infrastructure and IT and ITeS. It is
expected that the domestic IT/ITeS market should grow at least 15 percent in
2010," stated Sanjeev Singhal of Religare. NASSCOM predictions for the current
financial year are four to seven percent. The major concern this year is around
the rupee appreciation and fluctuations which may drag growth rates down. In the
next financial year, the industry is expected to rebound, though arguably not to
the pre-slowdown levels in 2010. Speaking over the trends for this year,
Parakala commented, "Both TCS and Infosys have already shown better than
expected results in the last quarter. Both companies reported better utilization
and an increase in business." Kashyap Kothari of Mumbai-based Kothari Infotech
opined, "In times of the slowdown, there was a decline in business as projects
were postponed or cancelled. The situation is however improving now; compared to
the previous year, I think business will have a positive growth."

Although it is expected that the IT budgets may be relatively flat this year,
firms are expecting continued demand for outsourcing services from the US as
offshore outsourcing is expected to increase. "I think that the days of the
recession are over and we are heading towards the phase of recovery. This phase
is crucial for business to set things back on track and I believe that in two
years time it will be fine. For the time being, recovery will be slow but steady
and this is the most important part," said Atul Jalan of Manthan Systems.

Overall, in the present market scenario, the discussions on large deals are
back with major SPs commen-ting on incoming of large projects with the business
environment seemingly eased.

Avishek Rakshit

avishekr@cybermedia.co.in