A shake-out amongst the tier-ii it firms was always on the cards, but the recent bout of rupee appreciation against the dollar would appear to be hastening that eventuality. The report cards for the April-June quarter are a bleak reminder of the possibility of small and medium it services enterprises falling by the wayside in the near future. "With the government doing little to halt the currency appreciation and giving no assurance on the extension of the tax holiday under the STPI beyond 2009, the survival of SMEs in the industry is threatened," says Kiran Karnik, President, Nasscom, the body that represents the it and it-enabled services industry.
With a section of analysts forecasting a scenario in which the rupee will climb to some spot between Rs 35 and Rs 38 to the dollar in less than two years, IT services players clearly have to derisk operations by focussing on non-dollar geographies. After all, every 1 per cent rise in the value of the rupee against the dollar shaves 30-50 basis points from operating margins of Indian software services exporters.
Tier-II it services players would appear to be more dependent on the US than their top-tier counterparts. For Aztecsoft, for instance, 85 per cent of revenues come from the US, and in MindTree's case, that figure is close to 80 per cent. "We will be setting up offices in Eastern Europe and Latin America sooner than expected; earlier we had planned to do it in the next 2-3 years but the currency appreciation has made us consider it in an urgent manner," explains Rostow Ravanan, CFO of MindTree.
Other strategies to protect margins are also being executed. iGATE Global Solutions, for instance, is looking at ways to cut cost by reducing the average cost per employee and by negotiating higher rates in all recently-renewed projects/contracts. "As a longer-term strategy to mitigate the adverse impact of exchange rate risks, we started over a year ago, including provisions for rate revision in our customer contracts. These provisions are triggered when the rupee-dollar parity changes beyond specified levels," says N. Ramachandran, Member of the Board and CFO, iGATE. But many feel the focus has to be on cost control, and especially salary cost, which is by far the biggest component (40 per cent) of total costs. "For many small and medium level companies, wage revision could be revisited," says Ravanan.
But not everyone is looking at such a grim future. Says Ashank Desai, Chairman, Mastek and President, Asian-Oceanian Computing Industry Organization (ASOCIO): "There would be some companies that won't be able to survive, while there would be companies that have moved up the value-chain. So, I don't expect a catastrophe."