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Most medium and small information technology companies in India are finding it tough to compete with the big companies in offshoring and are under pressure from rising staff costs, excessive dependence on visas and a volatile rupee.
Revenues of most of these companies have grown between five and 10 per cent over the last four quarters. Their operating profits have fallen by four-15 per cent.
"Demand is on the rise from the US, but it is more for onsite or near-shore contracts than offshoring," said an analyst with Emkay Global Financial Services who did not wish to be named. "Since small companies lack investments abroad, they are losing out."
The Bangalore-based Mindtree is a case in point. Its Rs 112 crore operating profit in the quarter ended June was 24 per cent less than in the previous quarter. In July-September 2013, the company's operating profit was Rs 184.60 crore, which declined to Rs 135.20 in the next quarter.
Similarly, the operating profit of Pune-based KPIT Technologies slipped to Rs 94 crore in April-June 2014 from Rs 105 crore in the previous quarter. In the July-September 2013, the company reported Rs 110 crore in operating profit.
The trend for small infotech firms contrasts with their larger rivals which have built near-shore and onsite capabilities over several years.
"Reasons that have affected medium sized infotech companies include visa costs, currency appreciation and wage hikes. Besides, onsite revenue growth erodes profit margins because of the associated high cost," said Shashi Bhushan, an analyst with stock broking firm Prabhudas Lilladher.
"At least through 2014-15, we see operating profits of mid-sized companies remaining under pressure as the demand composition is expected to have more of an onsite requirement," added the Emkay analyst quoted above.
Larger infotech companies are able to manage costs better because of their presence in overseas markets and end-to-end capabilities. "Investments in low-cost delivery centers, focus on innovations and large investments in areas like social, mobility, analytics and cloud have brought down the cost of delivery for large companies," said Sanjoy Sen, senior director of consultancy firm Deloitte India.
