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Global Recession and Indian IT Services Companies

This recession might not be as severe as the 1928 Great Depression or the Black Friday (24th Sept 1869) but it sure will spoil the boom party and might even spell doom to a lot of banking and housing giants. But what does it mean for indian IT Companies?

My theory says more business, higher revenues and profits. Not convinced, here’s how:

1) Little effect of Weakening of Dollar:
I agree that IT industry earns primarily in USD and spends in INR, but have you realized what are the margins in the industry?
Do you actually think that an industry which works on a profit margin of 30%+ would worry about a percentage point or two drop in the exchange rate?

2) No Fixed Costs:
Lets even assume that the dollar devalues so much that the margins in the IT industry are in trouble. But the beauty is that the single largest cost component in the industry is salaries. With the attrition being as high as 30% and the company recruiting at the rate of 25,000 employees a year, it should not be hard to cut costs and restore the margins back to the original levels. Also almost half to 1/3 of the salary is through performance linked pay, variable pay, or bonus, hence the HR has a lot of freedom to cull costs.

3) Desperate times need Desperate Measures:
If you have realized, one of the biggest problems that Outsourcing industry was facing was resistance from US nationals. This is the major reason why the outsourcing industry could not expand at the rate at which they want to. However when the US company itself is in danger of going under, they will see Indians not as a threat, but as a saviors which would help them cut costs and reduce the losses.

4) Revenue sharing model.
Recently indian IT companies are trying to move up the value chain by not only doing small projects but also becoming strategic partners. The entire IT is outsourced to India and in return the IT company gets a percentage of the company’s revenue. Software is like WindowsXP, making the first copy is expensive, but once that is done, churning the next 1 million copy does not cost much. Also once an indian IT company enters into one such contract, it would be virtually impossible to displace them. and sooner or later when the recession is over, everybody would reap the benefits.

5) Acquisition, expansion,
Just like the 2001 software bubble, this could be a wonderful opportunity to acquire new companies, open new office and grow globally.

6) Its a business cycle
Come on u did not believe in that there can be a perpetual growth. All businesses have their cycle, and thats part of life.

7) Debt free
Indian companies have almost zero fixed costs, no debts, huge margins and are sitting with stock piles of cash…. and u are worried about their fate?

8. currency futures/hedging
Most of the contracts have a fixed payout and a pre-negotiated time line. So any smart company would buy future contracts so that the rupee value of the existing contracts does not dip.

9) Europe:
The next big growth story is Europe and thats where India’s future and most growth is.

In short no matter what happens indian IT will continue to prosper.

15 replies on “Global Recession and Indian IT Services Companies”

Ankur, I don’t agree with your analysis somehow. Your points # 2 and # 7 are contradictory. You’ve left out the single most important determinant- translation costs on Balance sheets.

#2 says that Labor costs are fixed costs- they are not fixed costs; infact labor wages are variable, which you’ve proved when you said that ” With the attrition being as high as 30% and the company recruiting at the rate of 25,000 employees a year, it should not be hard to cut costs and restore the margins back to the original levels.”

Aren’t you kind of contradicting yourself everywhere?

@prax…
thats just a coincidence … trust me when i say i had little to do with it.

@ruhi…
#2… i was pointing out that all the costs are variable, and it is easier to control them then what market is anticipating….
and in #7 i just repeated it.
i just edited the post to remove the ambiguity…. thanks for pointing it out

//balance sheets://
i talked about high margins, being debt free, most costs being variable, a healthy revenue growth and sitting with huge piles of cash reserves… what else should one look for in a balance sheet?

i know – i had intended the comment as an irony

there are far too many variable with the mkts nowadays
what it also finally boils down to is the general sector sentiment and as u know we indians r sentimental

europe is a sunshine sector but the eastern europeans are gonna be tough competition

What else you should look at esp. when you are talking about overseas businesses?

Translation of those revenues, operating margin et cetc etc onto the parent’s financial statements in the US, which in light of the recent downturn will shape up quite badly.

@prax..
i believe that indian markets are irrational in the short term.. but very rational in the long term.
so the negative sentiments only gives investors to enter in a good stock at affordable rates.

@ruhi..
the balance sheets are in a very good health (btw most companies these days are valued not on the basis of the bookvalue/assets they hold, but their potential and future income… which i think will continue to outshine.
anyways call it my optimism, but somehow i have a feeling that the world economy will only get a minor jolt… Fed and banks took preventive actions very promptly and hence there should not be a widespread panic….

//(btw most companies these days are valued not on the basis of the bookvalue/assets they hold, but their potential and future income…

Sure they are, but their potential income is not recorded on financial statements.

//Fed and banks took preventive actions very promptly and hence there should not be a widespread panic….

I don’t think that lowering rates is a way of dealing with this problem. only $70 bn of losses have been revealed so far. I don’t know if you’ve read reports by Goldman Sachs, but the total losses can exceed even $400 bn.

@ruhi..
//Sure they are, but their potential income is not recorded on financial statements.//
exactly… that is why stock market is much more than a simple balance sheet.
what i believe is that if you are choosy about the sector, invest in companies with sound management, and cross check that the balance sheet does have any red flags (i.e. financial are good enough) then you are bound to prosper.

I have never read their reports… most of my information on US economy comes from indian newspapers and economist.
Goldman Sachs’ advice is not a very trustworthy… last quarter their personal finance arm encouraged the clients and the funds it manages to pick up mortgage bonds, while the bank applied an opposite strategy for its personal wealth and was short shelling them in a big way.. hence no wonder that even though it is the only big bank which is made profits last quarter, its market capitalization and its reputation has gone down.
i won’t be surprised if the clients start withdrawing money from its funds and move it to other banks

When I said timely corrective actions, i do not mean the recent rate cuts… housing and subprime talks have been going on since June and the the financial analysts should have known it in May itself. in short, over the course of past 7 months every body has not only been adequately warned, but has also taken adequate preventive measures.. and yet the actual recession is yet to come to light… don’t you find it unique?

Guys did you notice that as we had predicted Infosys profits rose by a healthy 25%, and its profit growth was faster than the revenue growth (indicating an increase in margins)….
everything seems to be just as we had predicted.

let them be bearish while u r laughing your way to the bank… look at ICICI bank… 2 weeks people were bearish about it and i bought options at 1200, then immediately after that people became bullish and increased its valuation to 1400.. and then they r bearish again.
our task is to utilize this short term insanity to make the best long term sense.

PS: I bought 18 TCS shares and 25 INFY shares 🙂 apart from my usual Apollo hospitals, SCI, Tisco and ranbaxy… a hectic day

The titanic (US economy) is sinking and you are expecting lucrative future business from the ship underneath the water.The USA and Uk have only two options, either hyperinflate or enter economic depression.An year or at the most two, either US and UK enter economic depression or one rupee will equal few hundred dollars or a few hundred pounds.Stop sitting before computers and doing some crap for foriegners.contribute something to india.

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