The Hindu Business Line : IT cos may reduce capex to counter meltdown

New trend
TCS is in the process of reviewing its capex programme
Cognizant has trimmed its capex for the current fiscal by 10%
Infosys has ruled out any change in its planned capex expenditure

Adith Charlie

Mumbai, Dec. 9 Indian IT companies seem to be going slow on their capital expenditure or capex plans as they seek to conserve cash to withstand the global economic downturn.

While Mumbai-based Tata Consultancy Services (TCS) is in the process of reviewing its capex programme, Cognizant Technology Solutions has trimmed its capital expenditure for the current fiscal by 10 per cent.

Analysts expect other IT exporters to follow suit.

Capital conservation

“Conservation of capital is now on top of the agenda for Indian IT companies,” said Mr Sudin Apte, Senior Analyst and Country Head (India), Forrester Research.

And this trend of going slow on capex indicates that software firms are anticipating and preparing for tougher times going ahead, he added.

Capital expenditure is the total amount of money spent by a company to acquire or upgrade physical or technological assets, such as buildings, computers, servers etc. Nasdaq-listed firm Cognizant has reduced its planned capex for the current fiscal (which ends December) by 10 per cent to $225 million from its original target of $250 million, according to the company’s recent filing with the Securities & Exchange Commission, the stock markets regulator in the US.

In August this year, Cognizant revised downward its estimate for full-year revenue by six percentage points (from 38 per cent to 32 per cent full year revenue growth) from the original estimate of $2.95 billion to $2.81 billion.

The IT sector was growing at an average rate of around 30 per cent until two years back. However, the global slowdown, coupled with the volatile currency environment has negatively impacted the financials of software companies.

Mr Kris Gopalakrishnan, CEO of Infosys Technologies, the country’s second largest software exporter, said recently that the IT industry would grow by only 15 per cent this financial year.

However, the Bangalore-based software major has ruled out any change in its planned capex expenditure of $250-300 million for the current fiscal, a company spokesperson said.

A spokesperson for TCS said that it is re-examining the setting up of those new facilities and SEZs, for which construction work has not yet commenced. “We are looking at whether we can stop these initiatives at least temporarily and look at conserving cash,” he said.

Moreover, the requirement for additional seats has come down because of the overall demand environment.

“Going forward, if we require more space, we could get it on lease,” the spokesperson said. Earlier this year, TCS had said it would add 30,000 seats in the country.

The company also spent $13 million for purchasing a 1,96,000-square-foot building at Clermont county in Cincinnati in the US, spread out across 222 wooded acres.

However, TCS said that there is no change in the capex of Rs 1,900 crore (approximately $383 million), earmarked for this year.

Despite repeated attempts, the Hyderabad-based Satyam Computer Services, refused to comment on whether it too was in the process of reviewing its capex. A spokesperson for HCL Technologies said the company does not provide any guidance on its capex strategy.

Delivery centres

The reduction in spend is expected to be achieved by IT companies going in for consolidation of delivery centres, especially the ones located in the same city, according to Mr Arup Roy, senior research analyst, Gartner. (For example, if a vendor has five development centres in Mumbai, those could be consolidated into two.)

“This enables firms to cut costs by the resultant consolidation of data centres and employment of virtualisation techniques,” said Mr Roy.

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