IT, BPO Grew As Per Estimations In FY07
The IT industry performance for the 2006-07 may fit in order with prospects. It’s not just escalation of the rupee that will affect the attitude but also enhancement in salaries and the minimum alternate tax (MAT), which could catch a charge on the IT industry, in a cumulative manner.
The other worrying part is the constant habituation of the IT industries on the habitual applications development and maintenance (ADM) tasks and their incapability to expand considerably to the advanced charging and harder undertakings in fields like marketing, logistics, automobiles and aerospace.
Sid Pai, partner TPI International stated, “Sustaining top line growth will be a challenge.”
Kiran Karnik, president, Nasscom added, “Margins will be down 1% to 2%. M&A activity will also be impacted with valuations coming down.”
Pai added, “The market share numbers are a cause for concern. The Indian IT companies have at least a 26% market share of the $50 million plus contracts in the ADM space. Some studies estimate the share of Indian players to be 50%. While demand is there, the fact is that there is a limit to how much you can grow with routine services. Adding to the problems is the fact that billing rates are flat and companies do not have the capability to deliver the much talked about high value tasks.’’
While there is lot of opportunities for the IT companies to nurture which effectively could guarantee topline growth at rates witnessed in the past that is upwards of 30%, it is the large players who will have to evaluate their options.
Karnik says, “I don’t see a reason why topline could be impacted. Though there could be constraints in managing the growth. For instance, the industry could find it difficult to get the right kind of talent.”
Despite the lack of expert workforce, one more matter is the amplification in wage rates that will have effect on profitability.
Vikram Bapat, associate director, PricewaterhouseCoopers (PwC) says, “Wages have been increasing at about 12-15% a year. I see a combination of factors including wages, minimum alternate tax, fringe benefit tax on ESOPs, sluggishness in the US economy and the strengthening rupee together denting operating margins.”
Normally, for every 1% variation in foreign money in contact with the Rupee there is a 0.4% collision on working margins.
CFO of an IT major alleged, “The Companies usually take forward cover for one or two quarters to take care of currency fluctuations. Though if the rupee continues to remain strong, as is anticipated, there will be a squeeze on margins.”