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Mid-size IT cos struggle to maintain growth, margins

Mid-size IT cos struggle to maintain growth, margins
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First Published: Thu, Aug 02 2007. 01 08 PM IST
Updated: Thu, Aug 02 2007. 01 08 PM IST
Mumbai: Indian mid-size software companies, hit by the double whammy of a rising rupee and wage inflation are scrambling to form strategies to sustain growth and margins.
Higher prices from customers, better utilisation, increased onsite revenues and lower wage hikes are the countermeasures being adopted.
Tech Mahindra Ltd. vice-chairman and managing director Vineet Nayyar summed it up nicely. “We did manage to produce results which still outperform the market but going forward our margins would be under huge pressure.”
It reported a better performance with a 59% profit growth in the June quarter. Hexaware Technologies, which has been consistently growing at more than 35% over the last four quarters, saw its net profit actually dip.
Executive Chairman Atul Nishar said the management had decided not to issue guidance for the current quarter. “We will wait for the rupee to stabilise.”
Wage inflation
The tech sector has seen wages rising 15-18% annually, but companies are re-thinking the quantum of hikes for next year.
“There should be other ways of incentivising employees rather than just pay hikes,” said C.P. Gurnani, head of International Operations, Tech Mahindra.
Global brokerage house Credit Suisse in a snapshot of 14 mid-size firms, said “even excluding the rupee impact, salary hikes in some companies should bring down near-term margins.”
Rupee appreciation
The rupee, which appreciated 6.75% in the April-June quarter, caught the sector unawares. “We knew it would appreciate but not so fast,” said Nishar.
Hedging their dollar exposure is a short-term measure. “Large companies can use hedge strategies effectively but for smaller companies it is too complex,” said Arup Roy, Senior Research Analyst, IT Services, Gartner Inc.
Large firms have cut exposure to the US to around 50-60%, from over 75% two years ago, he said.
Others like 3i Infotech - net profit rose by 89% - have increased onsite revenues. This ensured that both costs and revenues were in dollars, thus easing the rupee impact.
Aztecsoft’s - its net profit fell 39% - onsite revenues rose to 25% from 19% the previous quarter and is aiming to take it to 30% by the year-end.
“The onsite-offshore model has to be balanced. The dollar cost has to be offset by improved efficiency and increase in volumes,” said Roy.
Higher billing rates and utilisation
Mid-sized firms are also passing on costs to clients by negotiating contracts at a higher price. “There is a lot of headroom for higher price realisations,” said Roy, adding smaller Indian firms with a niche focus were moving up the value chain.
“We are going to all our customers and asking for rate hikes. The rate hike which we have been able to get has been anywhere between 5-15%,” said Samir Bodas, president of Aztec.
Credit Suisse in its report said getting higher rates varied among companies. While Cranes Software, iGate Global and Aztec were getting better prices, some like Mastek could not as their rate was already on the higher side.
Utilisation levels in the sector are already over 75% in many companies and top executives agreed it would be counter-productive to push beyond a point.
“We can raise it to 80% but not beyond that,” said Nishar.
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First Published: Thu, Aug 02 2007. 01 08 PM IST