Euro crisis
The Hidden A Advantage Euro crisis would mean bad news on many fronts, but it is the advantages that we should focus on now...
32 | February 29, 2012
visit www.dqindia.com
SHILPA SHANBHAG
shilpas@cybermedia.co.in
recent note titled ‘A Slowdown in Europe and China, and Sluggish Exports Moderate AsiaPacific Credit Outlook in 2012’ by S&P, expecting a weak US growth and mild Eurozone recession during the first half of 2012, forced a shudder in the backdrop of the 2008-09 recession. The note mentioned that while emerging markets are expected to adopt an apprehensive approach, they are not expected to remain untouched by the rough weather that looms large over the advanced economies. While the US seems to be recovering from the recession of 2008-09, though very slowly, Europe is in the grip of the sovereign debt crisis. The European angle of the story can be attributed to the fact that European banks have massive exposure to the sovereign debts of Greece, Italy, Portugal, and Spain. This exposure will weigh large on banks around the world in a globalized economy apart. Even the UK is exposed to the Eurozone crisis. Amid all this chaos, the political crisis in the Middle East is expected to pressurize oil prices. “There are no signs to worry as the emerging markets would offer respite but are small in relation to revenue generation. Telecom, BFSI, and manufacturing would be affected the most. With the government pushing PSU companies to increase investments, it would provide a boost to the IT segment. In other words, spending from the government segment is expected to be on the upside,” informs Arup Roy, principal research analyst, Gartner. In an open economy, as much as one enjoys the prosperity of the global trends, one also has to take the adverse hit. “There are clear indications of a slowdown in China, India,
DATAQUEST | A CyberMedia Publication
“To attract FDI and FII, India has to hold on to its charm and sustain a steady growth”
Sujata Dev, co-chairperson, entertainment committee, Assocham and joint managing director, Third Generation Mobile
“The big bang approach of buying would dip, however there will be incremental IT spending with justifications on business benefits”
Subramanya C CTO, HGS
and other emerging markets. The EU, as a whole, is our second largest trading partner after the GCC. We were able to weather the 2008-09 recession better than most countries because of better regulations in our financial system and the growth momentum in our economy. In the present environment, while the first factor is still relevant, economic growth is slowing down because of rising input costs, a high interest rate regime, and the almost free fall of the rupee,” says Rajeev Gupta, president, Fujitsu Consulting India.
Infusing Support
There seems to be a mixed reaction among stalwarts of the industry on the movement of the Indian sensex. While some expect it to witness a temporary setback with a wait for tangible results expected to be long as the second half of 2012. “The stock market sentiments would continue to give negative vibes because of uncertainties around the world market and the ongoing crisis around corruption and political inDATAQUEST | A CyberMedia Publication
stability in India. I presume that the market sentiments would become stable in the near future as even the Indian government is committed to take steps to stabilize the growth and market sentiments. Considering the election year, I am personally of the view that the market sentiments and political instability would move in a positive direction towards the later half of 2012,” adds Rajeev Kachhal, CFO, Fiserv India. “Eurozone’s sovereign debt crisis looks like a long-term issue and will have its impact on the global economy. India Inc, as a whole, has 18% export exposure to Europe and 10% to the US. So, the Indian companies have to re-strategize their global marketing and also look for Asian markets to sustain their export volume and earning. However we must keep in mind that economic progress can only happen when there is long-term tranquility and stability. To attract FDI and FII, India has to hold on to its charm and sustain a steady growth,” feels Sujata Dev, co-chairperson, envisit www.dqindia.com
tertainment committee, Assocham and joint managing director, Third Generation Mobile. “The current state of flux is likely to remain few years. But it is great opportunity for the emerging economies like India, especially for mid-segment companies,” feels Rajagopalan Babu, founder and CEO, Enteg. Meanwhile, on the other side of the coin is the school of thought, which is of the view that with the recent upgradation of India’s rating to investment grade by Moody’s, would help in attracting FIIs. “Euro demands immediate attention. The present crisis is not as much due to fundamental problems as it is due to lack of confidence in the ability of the governments to sort out the problems. It is difficult to predict when the crisis can end. But we should see some improvement from March,” feels Subramanya C, CTO, HGS. In a falling market, things may look gloomy for traders, but someone’s loss is somebody’s profit. In a fast-growing economy like India’s, everyone wants to be a part of the story. Thus, FIIs will target India as the Indian economy is much more growth oriented. However right government policies and political stability will also be critical in determining the risk rating and FDI flow. If Indian IT industry can sustain innovation then there should be no dearth of funds flowing, reciprocated with growth. On an inspirational note, Kamesh Ramamoorthy, COO, Ramco Systems reminds, “The current economic scenario is quite dull, but we expect this scenario to be a short-term effect and hopeful that the market will stabilize soon. It may be, world over, there is a preference for deposits as opposed to equity—a clear preference of investors who favor steady returns. Equity markets will continue as always to reward innovation. Business efficiencies February 29, 2012 | 33
Euro crisis “The current economic scenario is quite dull, but we expect this scenario to be a short-term effect and hopeful that the market will stabilize soon” Kamesh Ramamoorthy COO, Ramco Systems
“The exposure of the IT industry to the Eurozone is between 20-30% of its revenues”
P Venkatesh director and co-founder, Maveric Systems
captured by exploiting the cloud will definitely not go unnoticed.”
Magnetic Charm
With funds drying up there is a bigger question that staring at the face—the fundamentals remain strong as ever, but has India lost its shimmery shine? Though India isn’t growing at 9%, even 7.5% can be rated as one of the best GDP growth rates. The temporary flight of foreign investors can be associated with insecurity about the future than with the present reality. Depreciation of rupee against dollar is one factor which has made FII equity investment temporarily unattractive. Even the Indian companies are investing abroad and have become bearish on domestic investment opportunities. “Currency devaluation, end of the tax holiday period, and uncertainties around tax regime (likely introduction of new direct tax code, etc) are acting as a deterrent towards infusion of fresh investments in India. However the Indian 34 | February 29, 2012
government is taking steps to promote FDI in India (such as allowing 100% single brand retails FDI proposal, etc),” feels Kachhal. “India is still a favored destination, especially from a talent standpoint, and we will continue to see the expansion of captives. Very often the same investors also have an eye on the domestic IT market, making it a synergistic relationship. India also serves as a test ground for products/business models being developed for the fast-growing emerging markets worldwide,” feels Daisy Chittilapilly, VP, ITS sales, Cisco India and Saarc. On the domestic front, if the country is able to kick-start the stalled reform process in retail, insurance, etc, attract FIIs back to India, ease up on interest rates to reinvigorate manufacturing, and entrepreneurial activity, things could look positive by the Q3FY12. Globally, a lot depends on how the Eurozone countries handle the impending crisis in Greece, Italy, Portugal, Spain, and Ireland. visit www.dqindia.com
IT Affected?
Historically, a tough economy has always been a hotbed for ideas and over the last generation, IT has become integral to the adoption of a breakthrough idea. In the emerging economies, IT is viewed as process enabler and adoption of these process enablers has been quicker because these economies are nimble and can avoid the pitfalls of larger, stodgier countries. Eurozone crisis and protectionist tendencies of the developed world are expected to have a negative impact on India’s growth graph across all the sectors. India’s export which recorded a growth of over 82% in July, slowed down to a mere 10.8% during October, reflecting the impact of the Eurozone crisis. It can also not be refuted that the 27-nation EU is India’s largest trade partner and export market. Most feel that the impact would weigh directly on exports and this trend is expected to continue for months in a row. With a trade deficit of close to $150 bn, a depreciated rupee will add more pressure on the import bill and increase the cost of living. Overseas companies are also expected to press the caution button in respect to spending. “Of course there will be some impact of the prevailing depressed economic conditions on the emerging markets. The big bang approach of buying would dip, however there will be incremental IT spending with justifications on business benefits. Generally, large third-party service providers, including HGS, would have minimal impact, as IT is an enabler for the business. Our experience in the last few years, ie, during the times of slowdown, the average contract time and size has seen an increase. The clients now look at BPO as a long-term option to contain costs and add value. As majority of the organizations are moving towards cloud usage; the IT
DATAQUEST | A CyberMedia Publication
Euro crisis Key Metrics from December 2011 Quarter Results n Currency benefits helped expand margins by 60-265 bps QoQ for the tier-I firms. Rupee depreciation provides Indian IT with a windfall, which can be reinvested to accelerate market share gain. Midcap names had a windfall and allowed all of it to pass through the P&L n Improved QoQ for Infosys and TCS. More important, commentary of stable or marginal pressure on pricing is encouraging and shall ensure little margin headwind for FY13E n Verticals like BFSI, manufacturing, and retail showed good growth across players, while strong revenue growth in Europe came as a positive surprise amid the ongoing concerns of the Eurozone crisis affecting IT spends n Infosys revised its FY2012 USD revenue growth guidance down to 16.4% from 17-19%, indicating flat revenue growth for Q4FY12 n Wipro’s guidance was of 1-3% growth in Q4FY12 n Attrition for all key players came down even as lateral hiring numbers remained strong * Note: These views are gathered from Kotak Institutional Equities Technology India Report.
The Euro crisis is putting pressure on all economies. This would have an effect on IT budgets. Customers will spend on missioncritical solutions, that would start paying back within a year suppliers need to explore alternate business models to meet market expectations,” says Subramanya. When the general health of the economy is anemic then the IT industry also feels the weakness. IT industry in India is likely to be affected in a variety of ways by the world’s economic problems as organizations endeavor to increase efficiencies in IT delivery. While a fall in rupee definitely means good news for export-oriented sectors like IT services, textiles, and services sector in general. But on the other hand, it would spell a bad news for product exports and worse still for the IT and industrial products segment. In the long run, weak rupee is not a good sign, as it may curtail R&D and employment in non-services segment. BPOs that are back-end service providers for European countries, basking in 36 | February 29, 2012
the Euro glory, are now feeling the heat as their bottom lines are on fire. The export-oriented units located in SEZ and STP can be accounted for as the worst affected, depending on their dependency on the European markets. These companies will face problems in fulfilling their export obligations. “The profitability of the top Indian IT companies will dip over the next 3 years, as buyers in large corporations are able to clearly visualize the premium they are paying. This would bring the profitability down. The buyers are looking for alternatives. This may be a great opportunity for niche mid-sized companies focusing in specialized areas. Current contracts are largely ‘time and material’. The Indian IT companies should consider proposing alternative billing models such as ‘pay-peruse’, ‘result based billing’, ‘pay-pervisit www.dqindia.com
ticket’ models, which would enable the service providers to optimize the resource usage and customers to get the cost benefit,” says Babu. “The exposure of the IT industry to the Eurozone is between 20% and 30% of its revenues. In the shortterm, it is likely to impact the IT industry since there could be delays in decision making for the projects in pipeline. Among the top Indian IT companies, Infosys and CTS have expressed their desire to increase the contribution from this segment,” informs P Venkatesh, director and co-founder, Maveric Systems. IT industry is no exception and the slow down is evident. India’s short-term growth prospects have been impeded and has distinctly slowed down. If the Eurozone crisis prolongs, growth in exports will be further impacted. With cost pressure building up in advanced economies, the Indian IT companies need to focus on delivering value to customers. As a whole, India is lucky to have a self-consuming market and the impact compared to developed market is going to be much lesser in the long-term. In a man versus machine (automation/service) scenario, the process can always be bettered. But surely the companies need to gather inspiration from the recent words of Narayana Murthy, chairman emeritus, Infosys, ‘Eurozone crisis will make business more competitive’. One needs to adopt a wait and watch policy of how the Indian IT industry can keep itself afloat if we were to face the same parameters of 2008 meltdown.
Budget Beating
Euro crisis will have an impact on the IT budget of companies. While Sridharan Mani, director and CEO, American Megatrends India refutes, “Not very likely as the Indian exports to affect Euro Countries (Spain, Greece, and Italy) is less than 3%.” Seconding this stand,
DATAQUEST | A CyberMedia Publication
“There are expected to be slashes in budgets which will require CIOs to become partners of the business, a bigger role indeed”
Rajeev Batra CIO, MTS India
“The stock market sentiments would continue to give negative vibes because of uncertainties around the world market and the ongoing crisis around corruption and political instability in India”
Dealing with Cuts
Rajeev Kachhal CFO, Fiserv India
Gupta feels, “I don’t see budget cuts in IT spending in the near future, especially in strategic IT spending, but there will be greater caution and sales cycle could get longer. IT vendors will face more margin pressures as clients look to improve efficiency and keep costs low in their outsourcing models.” The impact would mainly be due to uncertainties around growth, exchange fluctuation, uncertainties around the future tax regime, and political instability in India. But, it will also drive companies to look for innovative technologies like cloud computing. The impact will be felt more on new projects than on the existing ones. New initiatives will be put on hold till there is sufficient clarity on the health of the global economy. IT is the very backbone of national growth. Most companies consider IT as a necessity than a luxury. Companies in the growing phase will continue to invest in IT to keep pace with growth. Euro crisis is imposing pressure in all economies. This would have effect on IT DATAQUEST | A CyberMedia Publication
get impacted. The organizations who have already invested into IT, will have to continue to get it managed effectively without losing the quality of services. Since the challenge is of cost optimization, they will have to explore the possibilities of outsourced activities mainly into 3 areas—managed services, infrastructure, and application management,” feels Atul Hemani, MD & CEO, Omnitech InfoSolutions.
budgets. The customers will spend on mission-critical solutions, that would start paying back within a year. Cautiousness around spending is expected in the short-term for companies with significant exposure to European markets. However a severe cut in IT spending is not anticipated because this will have negative repercussions on competitiveness, especially in terms of agility, ability to deliver services, etc. “This is a scenario that is being witnessed for the second time and this time a lot of organizations have become wiser and also not facing a pessimistic flavor as in 2008. CIOs need to ensure that they renegotiate deals and make smart procurements,” adds Devendra Parulekar, partner, advisory services, technology, communications and entertainment, Ernst & Young. “In the advanced economies, industry growth would be very marginal say about 1-2% or would remain flat, this impacts the new project spend and thus IT services related to new projects would also visit www.dqindia.com
There are new year mantras that CIOs could adhere to better deals with slashed IT budgets. First, convert capex into opex, stay at a safe distance from monster hardware, consider virtualization, etc. It is easy to add computing capacity after one year. Then comes stability, adaptation, and training cost on the agenda. It is advisable to allocate budgets to activities like training, enhancements in existing technology, etc. Investments in ERP like SAP, would help to better manage profitability and arrest leakage and while companies need to stay at a safe distance from large bundled software, which would have hidden costs attached. Investments need to be made for requirements for the next 2 years. Most components of the bundled software would remain as shelfware. “Alternative IT service providers need to be considered as big companies do not necessarily deliver great results. After all they outsource work to mid-sized companies. So, consider niche mid-tier companies and engage them directly. Several SaaS based solutions are available for non-critical applications. Pay smartly and maintain good internal IT team,” informs Babu. “If IT budgets are slashed (at all) then CIOs will have to prioritize their business necessities. May be they will take refuge to installing more IT devices to cut down on the February 29, 2012 | 37
Euro crisis At a Glance n India Inc, as a whole, has 18% export exposure to Europe and 10% to the US n Depreciation of rupee against dollar is one factor which has made FII equity investment temporarily unattractive n IT industry in India is likely to be affected in a variety of ways by the world’s economic problems as organizations endeavor to increase efficiencies in IT delivery n New technologies like social media, automated self-service engines, and cloud offerings will find a prominent place during 2012
The outlook for the year seems to be quite clear in terms that the IT and BPO providers should be sufficiently diversified to reduce their dependence on a single currency or geography budgets. For example Skype may replace international calls. In 2008, we saw companies going for video conferencing to cut down on travel cost,” says Dev. “IT is an investment for growth. Due to the prevailing depressed economic conditions, especially in the US and Europe, IT spends have been subdued. The view generally becomes short-term in such a scenario. However with the global slowdown stepping in its third year, the outlook will slowly change and efficiency will be a key determinant of success. As IT is the biggest efficiency enabler, the existing IT budget has to be used with some creativity. The cloud is becoming denser by the day, and a lot many CIOs are now aiming for it,” feels Subramanya. “There are expected to be slashes in budgets which will require CIOs to become the partners of the business, a bigger role awaiting indeed. There will be a need to simplify processes and require38 | February 29, 2012
ment to achieve targets to meet the customer needs through innovation, with RoI also hogging the limelight. During budget cuts there will be a need to achieve operational excellence,” informs Rajeev Batra, CIO, MTS India. “Domestic and some emerging markets will get a heads up for newer opportunities. Plus, given the merging scenario of unified communications and IT being seen as a process enabler, we are looking beyond traditional buyers of our services and are optimistic of finding larger opportunities. Enlarge the scope of automation of business processes and improve greater efficiencies in service delivery across the organization,” says MP Vijay Kumar, chief financial officer, Sify Technologies.
On a Final Note
The outlook for the year seems to be quite clear in that the IT and BPO providers should be sufficiently diversified to reduce their visit www.dqindia.com
dependence on a single currency or geography. Those interested in inorganic growth should look at this as an opportunity to add to their list of competencies. “Instead of following an all-out approach, we are strategically focusing on strong verticals for Ramco like banking, manufacturing, aviation, energy and utilities, logistics, government, real estate, and infrastructure among others. In terms of geographical focus, we are increasing our penetration in the emerging markets like the Middle East and Africa,” informs Ramamoorthy. “HGS has completed 3 successful acquisitions in the last 18 months and has also expanded its onshore presence in Europe. We now have HRO as a new offering and Canada as a new market, both with huge growth potential. Our topline has grown by more than 40% in the last 3 years,” informs Subramanya. Typically, in a slowdown, decision making also slows down. There is also a level of unpredictability and it’s important to factor that into operational plans. During the 2008-09 recession, attrition in IT companies dropped to single digits. The same phenomenon is expected to be witnessed again. Cloud has become a regular part of the lexicon of every IT manager, and the slowdown of 2008 is in many ways responsible for it. Companies are looking at becoming agile now. New technologies like social media, automated self-service engines, and cloud offerings will find a prominent place during 2012. There are certain factors that need to be borne in mind namely, more focus on cost optimization, develop requisite skill sets to combat newer technologies, and target the emerging markets. On a final note, Dev says, “Overdose of debt exposure kills! Be it a nation or a household.” n
DATAQUEST | A CyberMedia Publication