Nortel bankruptcy to have little impact on IT vendors

Written by Surabhi Agarwal | Rachana Khanzode | New Delhi/Mumbai | Updated: Jan 16 2009, 06:32am hrs
Indian IT industrys Big Three-TCS, Infosys and Wipro-put up a brave front on Thursday after North Americas largest telephone equipment firm, Nortel Networks, filed for Chapter 11 bankruptcy a day earlier. Though Nortel is a major client of all three firms, its contribution to their revenues is not significant.

However, at a time when the IT sector faces slower business growth, coupled with fallout from the Satyam accounting fraud and World Bank ban, the market reacted nervously. Infosys closed down 4% at Rs 1,252.05 on the BSE on Thursday, Wipro plunged 3.5% to close at a low of Rs 235.30 and TCS was down 5% at Rs 510. Shares of Sasken Technologies, in which Nortel has a 9.5% stake, was most severely hit, sliding 19% at Rs 43.75.

According to the bankruptcy statement filed by Nortel, Infosys and TCS had receivables of $2.9 million each from the company, while for Wipro, the figure stood at $3.1 million. According to the three IT firms, Nortels contribution to revenues stood at less than 0.5% for Infosys, under 1% for TCS and below 1.5% for Wipro.

As none of the countrys top mobile players have placed new orders with the Toronto-based equipment supplier, the impact on telecom service providers is also negligible. Vendors for Indian mobile operators are Ericsson, Alcatel Lucent, Nokia Siemens, Motorola and Chinese manufacturers Huawei and ZTE. Nortel supplied equipment to BSNL for its GSM network in the south zone a couple of years ago.

Industry experts expect no immediate disruption in Nortels IT contracts, either. Nortel has already stated that all its ongoing contracts will continue. However, the company may choose to consolidate its vendors to strike a better pricing deal. There could also be tightening of IT budgets as the company is cash strapped, said Deepak Kumar, GM-communications research, IDC India.

Adds Keshav R Murugesh, president & COO, Syntel Inc, Indian IT companies who have exposure to Nortel from a billing and receivable point of view could be exposed negatively in the short term since that money may not be forthcoming for a while. However, under bankruptcy laws, if a vendor is listed as critical, then after filing for Chapter 11, such a vendor gets priority when it comes to payments. Some Indian vendors providing critical support could secure that status.

In a report JP Morgan said, While Nortels bankruptcy itself should not have a significant impact on the financials of TCS, Infosys and Wipro, we believe it is a concern for the Indian IT sector as it reflects the weak health of the telecom OEM sector.