IT cos in local mkt shrug off Re hit

Is Indian IT headed for gloom and doom because of the relentless appreciation of the rupee against major currencies? The answer seems to be yes, given the fact that the Indian IT sector earns four out of every five rupees from overseas clients and that most IT exporters’ margins are being squeezed on account of stronger home currency.

However, the picture is not all that sombre as there are still some sons of the soil, that have significant India operations in the highly export-oriented IT industry. ETIG has taken a closer look at some of the companies that generate sizeable revenue by serving the domestic market.

These companies run operations in India profitably. They are shielded from the currency fluctuations to a great extent as only a small portion of their income is earned in foreign currency.

Tulip IT Services, CMC, NIIT and Spanco are among them. While Tulip earns all of its revenue domestically, the others generate more than three-fourth of their total income from India. Larger firms like Ramco Systems and Rolta India have about two-third of revenue coming from the domestic clients.

IT companies in India have traditionally looked westward for business. This was probably because the domestic market appears to be a tiny dot compared to the larger opportunities globally. Nasscom estimates the global IT market for Indian IT companies to be $45 billion.

Compare this with just over $10 billion domestic market. “You don’t see too many of them (Indian IT companies) active in the domestic market, as it is simply too small for them to focus their resources on,” says Rolta India executive director Hiranya Ashar.

Profitability on domestic projects is another issue. The size and scale of such projects may not be feasible for established IT exporters. Says iGATE Global Solutions CFO N Ramachandran: “We are not certain about the receptiveness here for global billing rates.”

He points out that companies are earning better margins from overseas clients and the gap between the two billing rates is wide. iGATE, a medium-sized IT services provider, earns less than 5% revenue locally.

This may be true for applications development and maintenance services (ADM), the forte of many IT companies. However, most inbound companies (companies with substantial presence in India) have a business model that centres around a niche market offering.

For instance, Tulip is a dominant player in corporate data communication and provides services to banks, financial institutions, and media companies. NIIT is a leading player in IT education, while Spanco offers telecom integration solutions.

Instead of cluttering up the highly commoditised ADM space, some of these companies provide specialised services. This, in many cases, offers healthy margins. Rolta, for example, has been operating at 40%-plus operating margin.

“At Rolta, we focus on providing geospatial information solutions to the government and private bodies. Domestic margins in this business are more or less similar to those earned from global projects,” says Mr Ashar.

IT opportunities in India are growing, both in size and scale. Not surprising that multinationals like IBM and HP are showing greater interest in the Indian market.