Tough 2008, but ‘WITCH’ vendors come out fighting
By Samad Masood
11 Feb 2009
The Indian IT services industry was hit by a triple-whammy in 2008: currency fluctuations, a global slowdown in new IT project spend and the crisis of confidence sparked by Satyam. Yet the leading players are showing impressive resilience, and the Satyam debacle could make them stronger still.
Tough 2008, but ‘WITCH’ vendors come out fighting
The leading Indian vendors suffered significant slowdowns in revenue growth over the last three months of 2008. At constant currencies, TCS grew revenues 24 per cent, Infosys 15 per cent, Wipro 19 per cent and HCL 22 per cent. This is pretty good growth considering the economic slowdown, but is still roughly 10 percentage points lower than growth this time last year.
Currency fluctuations meant that actual growth was much more muted: TCS -0.05 per cent, Infosys 8 per cent, Wipro 12 per cent and HCL 11 per cent. Cognizant, the ‘C’ in ‘WITCH’, has yet to report its results. However, as a US headquartered ‘India heritage’ vendor, it will be interesting when it does release earnings to see how differently the Forex dice rolled for its top and bottom line.
Despite Forex eating up a lot of revenue growth, the WITCH vendors continue to take large chunks of global market share off their Western competitors quarter-on-quarter – and they’re doing it as profitably as ever. The four top vendors that have reported all managed to either maintain or increase their margins in the period, despite the potential distractions of the economic crisis and a recent upsurge in acquisition activity.
In fact, the increase in acquisition opportunities is one of the most positive outcomes of the economic downturn, with the leading Indian players all taking advantage. TCS and Wipro picked up Citigroup’s Indian back office and IT divisions respectively, and HCL bought a string of companies over the year, culminating in its purchase of the UK’s Axon. Indeed, HCL beating Infosys for Axon meant that Infosys was the only leading Indian vendor not to acquire last year.
Satyam scandal benefits the Indian industry
Of course, the elephant in the room is Satyam. The company is operating under government administration, while the new board is securing funding for ongoing operations and currently looking for acquirers for all, not parts, of the business. Hopefully it will be a swift process. The board already has several suitors, including PE firms. Notably, Larsen & Toubro, an Indian engineering conglomerate with a medium-sized IT services business, bought a 12 per cent stake in Satyam a few days ago.
In the meantime Satyam continues to deliver on its customer commitments. It has even signed at least one new European contract. However, until there is a long-term plan for the business we doubt that many more clients will have the confidence to sign new contracts with the company. Unfortunately, the jitters caused by Satyam will also affect decisions to buy from other Indian vendors, and we expect the established Western vendors to take advantage of the situation where they can.
Satyam is India’s Enron in terms of the shockwaves it has sent through ‘India Inc’, and in time we expect significant regulatory changes in India aimed at tightening corporate governance and ethics. However, overall we expect the Satyam debacle to have more of a beneficial effect on India’s IT services industry.
It is already forcing Indian vendors to be even more transparent. Last week’s earnings calls were dominated by Indian CEOs reassuring investors of their commitment to increasing governance. Many vendors, most notably HCL, also increased the detail in their earnings. We expect this to quickly become the fashion for the rest of the Indian industry – and the rapid response will do much to rebuild trust.
Clients need cheap offshore services more than ever. Far from harming other Indian vendors, the effective removal of Satyam from the competition will be a boon to large and medium-sized Indian vendors. Many of Satyam’s clients multi-source their offshore projects with other Indian vendors, and therefore are already in touch with its larger Indian competitors. They effectively have an open door to poach the business.
A sale of Satyam to another medium-sized Indian vendor, perhaps even a BPO pure play, would also help to consolidate and mature the market, with the potential for any number of interesting new faces to take the helm. Already the leading tier-two player, HCL Technologies, has benefitted from the current situation by becoming the de facto fifth-ranked player in India. Satyam’s board has confirmed that its staff numbers are correct as reported, so any acquirer would be sure to jump into the top tier of offshore vendors, with a workforce that has a strong delivery reputation and impressive client relationships.
The Satyam crisis is certainly ‘edge of your seat’ viewing, and will remain so for the next few months. During that time we expect to hear more examples of Western and Indian vendors poaching Satyam clients and more gory revelations from the investigation into its accounts. Ultimately, while the Indian industry has been shaken and will probably get stirred around a bit too, in the long view 2008 will be remembered as a year that made India, and its IT services industry, stronger.
