 "Electronics City")
After a lacklustre year, the tide seems to be turning for the country's software service export industry. A slow but steady recovery of its key market of the United States and a sharp depreciation of the rupee against the dollar has propped up new prospects for software exporters.
Their domestic counterparts, however, are now bracing up for a tough winter ahead. Several industry officials and experts have told Business Standard that while the domestic Indian market continues to be plagued by bottlenecks in the award of government projects as well as subsequent payment delays, the tough economic conditions in the country have forced the corporate sector to cut back spending in the last 6-8 months, which has made the going even tougher for firms with significant exposure to the domestic market. Ironically, the Indian market which continues to be hugely under-penetrated was supposed to act as a buffer for software companies when global technology spends reduced to a trickle.
"Several companies are bleeding as business is drying up and banks have pulled back loans," says an IT consultant who closely works with these firms but does not wish to be identified. The person adds that this has also led to the collapse of some domestic IT firms while some others are struggling to keep their heads above water.
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Companies with exposure to the government sector are better off than the ones solely focused on enterprises The impact of spending freeze will begin to be felt now as majority of spending plans have been put on hold in the last 6-9 months. |
Telecom companies and banks-which usually have huge IT budgets-are battling their own crisis and not spending much
Money is stuck in government projects as payments which are milestone driven come through only at the project-closure stage
Competition from big IT companies, who are also turning to the domestic market in the slowdown, has hit smaller players
Navin Agrawal, executive director (e-governance advisory services) of audit and consultancy firm KPMG, says that companies which have exposure to the government sector are slightly better off than the ones which are solely focused on enterprises. "Last quarter, the GDP growth in the country was just 4.4 per cent, there is a complete dry down on the corporate side," he says. Companies are not buying services, not giving new projects or building IT infrastructure as major sectors such as manufacturing, IT, telecom, infrastructure and real estate are witnessing a downturn. Agrawal adds that so far, the revenues from deals signed in the past were still accruing but the real impact of the spending freeze will begin to be felt now as a majority of spending plans have been put on hold only in the last 6-9 months.
Kapil Puri, chairman of the Spanco Group, a mid-sized IT firm with significant exposure to the domestic market, doesn't mince words when he says that when one looks objectively, there are a lot of business opportunities in the government sector. However, for the last couple of years, contracts are designed in a way that payments are milestone driven and much of it comes through only at the project-closure stage, leaving thousands of crores of rupees stuck in government projects, he says. "The situation is not any different for large or small companies as everybody is in a tight spot right now. Large companies have the cushion of big balance sheets, small and mid-sized companies don't," says Puri, whose Spanco group posted a loss last financial year. The company has now decided not to take any new projects this year and focus instead on implementing the older ones. If you look at the project tenders, only a few companies bid for them these days against the 8-10 earlier because significant costs go into preparing bids or giving bank guarantees. Bank loans have also become difficult nowadays, adds Puri.
Crimping budgets
The IT industry's other big clients, banking and telecom, are reeling too. While there is some upgradation happening in the banking industry, the telecom companies are battling their own crisis and not spending much. "So, payments are not just stuck in government projects but also in the telecom sector where several new entrants are now in trouble."
Over the past few years, the tepidness in the global demand for technology spending had prompted most large Indian IT companies to look inwards, which in turn fuelled competition for domestic players as the giants brought to the table global best practices and also better prices due to economies of scale. Companies most impacted by this in the domestic market are tier-II and tier-III players as most of the large firms derive only a small percentage of their revenues from the Indian market. However, they too are facing the heat.
The country's largest software services firm, Tata Consultancy Services, saw its revenues from the Indian market drop from 8.8 per cent as a percentage of overall revenues during the March quarter of 2013 to 7.6 per cent at the end of the June quarter. While growth in the contribution of India revenues to Infosys' top line was almost flat, in the case of Wipro, the contribution of the India and the Middle East market came down from 9.4 per cent in the March quarter to 8.8 per cent at the end of the June quarter.
Anand Sankaran, senior vice-president, Wipro Infotech and Global Infrastructure Services, says that the first quarter of any financial year generally starts a bit slower as compared to the fourth quarter. However, he says that the overall mood of the Indian market, as far as IT is concerned, is better than what it was 12 months back. "It is better because certain segments that weren't performing well earlier are doing better now." According to Sankaran, telecom companies are doing well and a turnaround is also expected in the banking sector. "Banking has always been good, it will be better this year in my view." The momentum in the technology spending in the banking sector is being driven by core banking, data warehousing, analytics, risk management, compliance, security, customer resource management etc. Also, the central bank is about to roll out new banking licences which are expected to create a huge opportunity for both software and hardware technology firms.
Sankaran adds that within the government sector, the states are more prompt than the Centre in implementing technology projects around e-governance and other requirements. "The Central government is a bit slow, but I think some of the activity there will also pick up," he says.
However, delays continue to plague the projects, ever more so now. "If earlier it used to take two months from concept to request to proposal stage, now it's taking four months," Sankaran says. Similar is the case for the stage of tendering to final closure. The delay is lesser in states than in the projects driven by the Centre.
Plagued by delays
Rajesh Janey, president of EMC India, adds that there is a tendency to do a lot of due-diligence around everything in the government which is leading to the delays. "But, there are some large projects driven by surveillance, Unique ID Authority, and others. We hope that some of the infrastructure projects will also drive more investment." Janey adds that given the gloom and doom about the current environment, more conversations are happening around driving cost optimisation.
In some way, these are the very same trends which the Indian IT companies witnessed in their key markets of the US and Europe which have gone through a similar cycle of economic crisis. At the times of uncertainty, clients cut down discretionary spending and instead look at driving the maximum value out of their existing projects.
CP Madrecha, promoter of a mid-sized domestic IT company, Trimax Computers, says that while demand continues to exist in the market, it is not being driven by traditional application services but by the need for cost cutting. "Also, there is more demand for services around mobility, cloud, social media and analytics-all of which provide better cost optimisation."
Even as demand has softened, the silver lining for companies like Trimax is that there are millions of small- and -medium companies in the country which have never spent on technology before and may now look at it as a tool to wade through the current tough economic situation of today.
