'The US slowdown impact will be short-term'

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Delhi-born Promod Haque is better known as “the man with the Midas touch”, ever since he topped Forbes magazine’s list of venture capitalists in 2004. Haque is the managing partner of Norwest Venture Partners (NVP) and, according Forbes, has remained among the world’s top deal- makers for the past decade and a half.

NVP manages investments worth over $2.5 billion across 400 companies globally, including 22 hybrid investments in India. Its first direct India investment happened in 2005, in Pune-based Persistent Systems, and has since funded four other Indian companies across the Internet, travel, BPO and mobile entertainment space. In an exclusive interview with FE’s Reema Jose, Haque said a slowing US economy spelt more outsourcing business for Indian vendors in the long-run. Outsourcing was only expected to increase with time. He continues to bet big on the hybrid or cross-border model, which allows companies to establish development centres in low-cost countries, while setting up front offices in the market. Excerpts:

With the US economy in a slowdown mode and probably getting into a recession, Indian IT companies have started facing the heat. How will the slowdown impact the investor sentiment and the IT industry in India?

There is always some impact. I hear that the consumer confidence index in the US is on a five-year low currently. That is of some concern. About 70% of the economy is driven by consumer spending and when there is a five-year low at that, there is obviously some reason for concern that these consumers are going to cut back and then corporations have to cut back on spending. When corporations do that, they obviously look at the low-hanging front, which in many cases are the IT budgets. It obviously has an impact on the IT companies, especially in India.

But the issue according to me is the short-term effect. When you talk of the impact of a slowdown, it depends on what horizon you look at. The next three to six months’ horizon would be challenging for the Indian IT companies because there would be instability in the market. In the long-run, I think a slowdown will lead to more outsourcing, which will be beneficial for the Indian IT companies. A couple of quarters before that would be the challenge for the IT companies.

What, in your opinion, should the Indian IT players do so that they can maintain their growth momentum?

As I said, some of the IT companies will grow their businesses after the next three to six months. Larger companies will have to deal with the volatility in stock prices during the period. I think companies should aggressively look for new customers during the period because more companies in the US will outsource in the long-run.

How can the small and medium firms cope with these problems? Any specific measures that you think will help them mitigate the pressures? Do you think that we will see more mergers and acquisitions happening in the industry?

In any situation, whether it be in the US or in India, smaller companies will have to focus on building a strong balance sheet. It (how they cope with the challenges) depends on how strong the balance sheet is. If companies are well funded, and have a strong balance sheet, they will survive the next three to six months. If they are short of cash, it will be difficult. There will be some consolidation in the market place.

Do you think the Indian IT players need to move from the service-centric model, especially in the backdrop of the rising costs, the rupee appreciation and the wage inflation? What are the ways and means to tackle these issues?

There are some challenges in terms of the rupee appreciating. The rising costs—there will be some margin pressure, while your revenue is what it is. After the next six months, as I said, there will be more outsourcing. In the short-run, for the large players too, the challenges will affect your bottom line.

Only a good capitalisation can help companies pass through the issues. Otherwise, companies will have to raise more capital, but then there are issues of valuation and so on. Typically, there is always some lag between the stock market fluctuations and the valuation of small companies. It is over six to nine months that companies see that the stock markets are down and decide to do their valuation to make some money.

Does India still hold the same advantage it held a couple of years ago of having a trained workforce and cheaper costs? Have the rising costs and the wage inflation hurt the country’s image as an outsourcing hub?

You are right. But, we have to deal with that. Companies in India have to start looking for what I call moving up the food chain. If there were a company out there that has only cost arbitrage, then it would be difficult for them in the future. It would be difficult for companies that leverage wage arbitrage rather than knowledge arbitrage. We should move from commodities and work on building knowledge.

Does the cross-border or hybrid investments still work in the rising-cost scenario? Has there been any change in the model?

The cross-border model still works. We have several companies that are successfully running that model. It is part of the knowledge arbitrage that I mentioned before. Companies will do development work out of India not only because it is cheaper, but also because there is talent available in India. It still works for India.

NVP has been expanding its India team. What opportunities do you see in India to invest in?