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US slowdown: smaller IT firms more vulnerable than large peers

US slowdown: smaller IT firms more vulnerable than large peers
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First Published: Mon, Jan 28 2008. 12 07 AM IST

Updated: Mon, Jan 28 2008. 12 07 AM IST
Bangalore: Even as India’s top 5 software service vendors such as Tata Consultancy Services Ltd (TCS) and Infosys Technologies Ltd say they don’t see a slowdown in demand for their services from buyers in the US, it is becoming clear that smaller vendors could see orders slipping if information technology (IT) spending by such clients is tightened in the event of a recession in the world’s biggest economy.
TCS, Infosys and their peers Wipro Ltd, Satyam Computer Services Ltd and HCL Technologies Ltd have said the credit crisis in the financial sector in the US, the segment from where the bulk of revenues come for Indian software vendors, had not impacted their revenues in the latest quarter.
The October-December earnings for the top 5 firms have been in line with analyst estimates and vendors maintained their operating margins through improved billing rates, higher offshore leverage, a shift towards fixed-price projects, new client additions, higher manpower utilization and lower attrition. It is early to gauge the business scenario coming off the US, but any budget cut will impact small and medium-sized companies the most, an analyst said.
“It’s a double-edged sword, wherein at times budget cuts could lead to offshoring and at times not,” said Rishi Maheshwari, analyst with Networth Stock Broking Ltd. Some more clarity on IT spending is likely to emerge by February-March.
Mid-sized companies are already feeling the pinch of a slowing business environment, which is reflected in the third quarter results, Maheshwari said. Also, the 14% rise of the rupee against the dollar in the year to December coupled with 12-15% wage inflation has impacted the profitability and revenue growth of small and medium firms more than that of larger firms as they are well-placed to absorb any impact due to the size of operations.
The third quarter results of mid-sized companies such as Sasken Communication Technologies Ltd, NIIT Technologies Ltd and Geometric Software Ltd are unimpressive with exceptions of firms such as Tech Mahindra, Mastek Ltd and Infotech Enterprises Ltd that have done relatively well.
“The reality is that smaller companies do more of discretionary work rather than non-discretionary,” said R. Ravi, an analyst with Karvy Broking Ltd, adding they are more vulnerable to budget cuts. Top tech vendors have deeper client engagements in terms of tenure of contracts as also the breadth of service offering rendered compared with that of their smaller peers.
“When you have larger portion of revenues from discretionary projects, the probability of those projects being stopped is very high in case of budget cuts,” Ravi added. Discretionary projects are those that are not mandatory or part of regulatory compliance at a company.
R.S. Desikan, group chief financial officer at Mastek, said the larger firms have better productivity and efficiency levels because of economies of scale compared with the smaller firms, which should focus on specializing in specific areas and do more of value-added work. Mastek is relatively better insulated as it has 45% of its revenues coming from fixed-price projects and it earns some two-thirds of its revenues from the UK.
N. Ramachandran, chief financial officer of iGate Global Solutions Ltd, felt there is little difference in the way small and large companies will be affected in the event of budget cuts. Ramachandran said IT budgets in 2008 were expected to stay flat or marginally higher than in 2007, but the uncertainty over recession in the US remained.
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First Published: Mon, Jan 28 2008. 12 07 AM IST