Meltdown and the spiral effect

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: Until now, the banking, financial services & insurance (BFSI) vertical was seen as the prover-bial pot of gold for the Indian IT industry. With 30-40% of Indian IT services revenues emanating from the lucrative vertical, bellwethers in the tech industry ruled the roost.

That was then. As the magnitude of the global economic meltdown becomes clearer with each passing day, it is becoming evident that the BFSI vertical could well become the biggest casualty. And the likes of Tata Consultancy Services (TCS) or Infosys stand most exposed to uncertainties in the market. TCS gets around 43% of its revenues from BFSI, while the percentage for Infosys is at 33%.

Spillover of the negative sentiment does not stop at the BFSI vertical alone. Impact of the slowdown could percolate to other verticals as well.

While so far, these managed to remain insulated from the economic turmoil, the cracks in the wall have started becoming clearer now. S Gopalakrishnan, chief executive officer of Infosys says that this slowdown will have an impact on all the verticals, except for the government sector. “We are into retail, manufacturing, hi-tech etc. The impact in all these sectors is major,” he says.

“The problem is not really peculiar to the BFSI sector; it is radiating to everything else. But the centre of attention is really the BFSI,” agrees Hari T, global marketing officer, Satyam Computer Services.

For the record, manufacturing, telecom and retail are the biggest verticals (in revenue terms after BFSI) for the Indian IT industry. Alarm bells are ringing in industry circles as these verticals have started showing worrisome signs.

The BFSI sector is the largest revenue contributor of the Indian IT industry with roughly 40% share. The top five Indian

IT companies—TCS, Infosys, Wipro, Satyam and HCL Technologies (in that order) get around 30% of their revenues from BFSI. Manufacturing and telecom are the next big verticals for the top five companies with around 20.5% and 17%, respectively coming from these verticals.

Though it is difficult to quantify the impact, the next year is expected to bring some clarity. “The signs have just started coming in the October-December quarter. The January-March quarter is being said to be the toughest as the crisis will go up by a few notches. That is when the real picture will come into being,” says Navin Agrawal, executive director, KPMG.

According to analysts, there is an overall slump in the manufacturing industry, which largely comprises the auto, pharma, chemical and aerospace sectors. While many auto companies in the US have asked for a bailout package from the government, the aerospace industry also continues to be in the red. Pharmaceutical industry seems to be the saving grace as people are expected to continue spending on that front.

“Whatever happens as a natural outcome will continue to see spending. However, incremental spend may not happen,” says Harshad Deshpande, IT research analyst with Ambit Capital. This vertical also sees a lot of ERP spending, which is considered to be largely discretionary and may witness a decline in new SAP or Oracle licences being purchased.

Moving on to the telecom vertical, the general consensus is that software spending on telecom will witness a gradual slowdown. However, while equipment manufacturers will bear impact of the slowdown the most, telecom service providers are expected to be lesser hit. However, there is widespread belief that telecom service providers tool will not come out unscathed. Let us not forget that the likes of BT, AT&T, Alcatel Lucent and Deutsche Telecom are some of the biggest telecom outsourcers to Indian IT companies.

“The telecom vertical has been under pressure due to the client consolidation for the past 2-3 years. However, the nature of the business there is more real and won’t come to a halt because of the slowdown. At the same time, new investment and spend on value added services along with average revenue per user (ARPU) could see a drop,” says an analyst who didn’t wish to be named. On the other hand, services like maintenance and customer support are likely to remain unaffected.

Likewise, the outlook for retail is also not very good as the financial crunch is expected to have a direct impact on customer spending. Retail is the largest vertical for Indian IT companies after BFSI, manufacturing and telecom.

Among the top-5 companies, Infosys and Wipro have the largest presence in the retail vertical, which is a large consumer of supply chain management, inventory management and logistics management solutions. “The industry functions on legacy systems, and the current times could see companies deferring the switch to newer technologies,” says an IT analyst with a brokerage firm.

All is however not lost. There remain some verticals that have the capability to not only defy, but buck the trend. “Irrespective of what is happening to the oil price, energy and utilities will be a significant growth market. This sector has very disjointed automation processes today. And I think efficiencies of scale can be dramatically improved,” says Hari of Satyam Computer Services.