The Hindu Business Line : ‘Discretionary IT spends down’

Niteen Tulpule, Director-Corporate Finance, KPMG, decided to play it safe when eWorld asked him about the recovery from the US slowdown. “It is still early to comment on the timeframe for a turnaround at this point. The full impact of the sub-prime crisis has still to play out.”

However, he sees positives in commodity prices coming off their recent highs and oil prices declining as well as some positive economic data trickling in from the US.

“From an India perspective, the strengthening of the US dollar versus the Rupee eases the immediate pressure on the profitability of the Indian IT industry.”

On European expansion as a de-risking strategy, he says given the challenges of that market, Indian companies will have to look at onshore presence and focus on developing local language capabilities.

While confirming that there will be consolidation in the industry, he believes mid-tier companies that innovate their delivery model or service offerings or focus on niche areas such as engineering and telecom could survive this slowdown phase.

In an exclusive interview over e-mail, Tulpule shares his views on a range of topics relating to the Indian IT industry. Excerpts:

Your take on the latest acquisition by Infosys. What does it mean for the Indian IT industry?

Given that Infosys made its last acquisition five years ago, an announcement of that sort was imminent.

At first glance, the valuation may appear to be on the higher side, but the synergies that can be derived from the acquisition are potentially significant — enhanced capabilities in the SAP domain, strong presence in the UK, adding 6-7 per cent to its top line as well as potential improvement upon Axon’s current operating profit margins and significant new cross-sell opportunities for Infosys’ much larger portfolio of services.

Do you expect more such global acquisitions from Indian software services providers, especially given low valuations and companies being ‘up for grabs’?

Indian IT majors are increasingly attempting to move up the value chain.

Going forward, we will see many Indian IT companies increasingly take the M&A route, taking advantage of the global economic slowdown to not only to bolster their position as value-added consulting companies but also to add geographical reach, front ends and scale.

Scenario on the IT front as a result of the US slowdown, given that the industry has been largely dependent on the US market and, within that, on the FS (financial services) space…

Discretionary IT spends have slowed down and there has been a decline in the number and value of contracts from the US. Indian IT companies, especially those that have been predominantly catering to financial services, have been impacted.

However, it has also opened up M&A opportunities with quality companies becoming available.

What are the factors that would drive Indian IT companies to grab a share of the outsourcing market in Europe?

Given that the European market is relatively under-penetrated by the Indian IT industry, the slowdown may be positive for Indian vendors. European companies have been slower to outsource and offshore as compared to the US, due to various reasons including labour laws, culture and language differences.

However, given the pressures on the bottom line, they can now be expected to increase their focus on outsourcing, thus opening up opportunities for Indian IT companies.

As Europe has been a difficult market to penetrate, onshore presence will play a vital role in tapping into the European market. One can expect to see Indian companies continuing to pay premiums for Europe-bound quality acquisitions. Another significant area of improvement that the Indian IT industry could focus on is developing its language capabilities and going beyond the English language so as to have a competitive edge.

Future of ‘global delivery model’ from the previously touted offshoring model…

The evolution of the global delivery model from the bilateral offshoring model is linked to a shift in the client’s needs for the same. The client has begun evaluating different locations to ensure a well-rounded value proposition as opposed to a mere cost benefit. In any event, with rising inflation, high attrition, high wages and other hidden employee costs such as transportation, India is losing some of its cost advantage. Other low-cost locations such as Mexico, Australia, China, the Philippines and Eastern Europe are gearing up to reap the benefits of the global delivery model.

Your view on the likely consolidation… How do you see the future for the mid-sized IT companies?

Given their size, mid-tier IT companies find it more difficult to compete for high-value contracts. Mid-tier companies also undergo greater pressure on margins. Consolidation is the way forward for this segment as mid-tier companies look for suitable partners to enhance and complement their service offerings.

The players that will overcome this phase are those that will manage change through innovative value-added processes and constantly try to enhance their solutions portfolio. Such companies will do one of the following: Innovate their delivery models or service offerings, focus on niche areas such as engineering, telecom, GIS and attain leadership positions in their respective niches, develop IPR or compete by acquiring/merging, thus gaining scale, geographical reach and domain expertise

Where do you see the IT industry in a couple of years?

The IT industry’s dependence on the US, as well as the BFSI sector, will reduce, while European and Asia-Pacific markets will gain significance, as will the domestic market. IT spending in sectors such as healthcare and media will grow at a relatively faster rate.

dmurali@thehindu.co.in