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.

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15 thoughts on “Global Recession and Indian IT Services Companies

  1. 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

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  2. 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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