The hike in visa fee will hurt the onshore business of IT services firms, says Sudin Apte, CEO and Research Director at Offshore Insights. Margins in the onshore business are lower compared to the offshore business, Apte says
He sees a double whammy for IT services companies in the December quarter as the disruption from the Chennai floods will weigh on what traditionally is a weak quarter. But Apte does not expect the impact from the natural disaster to persist beyond a quarter. He sees Europe to be a challenging market for IT firms in 2016. Below is the verbatim transcript of Sudin Apte’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18. Latha: What is your sense of this visa fees hike itself?
Your long practice tells you that this may be brave talk but nothing will
come off it from the ministry? A: Visa fees is surely a concern especially for onshore services where the margins are already low and lot of clients because of the type of the work that can happen on onsite are looking for more and more onshore services. So, Indian IT companies have three-fold problem – one getting that class of resource itself had been an issue historically. Point two, the margins onshore revenue are lower and point number three – related to visa, is volume of visa itself is a problem and on top of that if the rates are increased obviously it is going to hit the bottom-line of most providers especially the large ones and the ones that have higher on-sight or onshore component. Sonia: The period for the entire IT sector is quite tumultuous in the last couple of months.
A lot of negatives have come together one is this visa fees as you spoke about the other is the Chennai situation and then we have seen seasonality also crop in with furlough in various sectors. Do you think it will be hard for the IT industry to meet National Association of Software and Services Companies (NASSCOM) guidance of 12-14 percent revenue growth in FY16? A: First little bit on a lighter tone, I think NASSCOM numbers are generally couple of percent higher than the reality. If you look at last few years that has been consistent pattern. On a serious note it is a double whammy for or double challenge for IT companies. Generally December is a low month especially from Thanks Giving to Christmas time you have couple of holidays.
Clients give furlough so there is a little bit of a lull in terms of a volume. Now just before the festive season in US started we had a challenge in India especially on the Chennai side where there was a two odd weeks of practically non billing and when the rains subsided and people could move around there was a time when the systems were being recovered. Especially communication and third part systems that IT companies took so it was a little longish than just two weeks. You have two of these challenges there is going to be impact for the companies which have got a higher concentration of resources in Chennai. The scale of this challenge has been so high for Chennai location that shifting the work to other location or trying to sort of work on some redundancy became very difficult especially for firms like Tata Consultancy Services (TCS) , Wipro , Infosys and some of the Chennai based companies this surely was a bigger problem.
Latha: Will this be just a one quarter hit? A: This of course, Chennai surely, one can say it is a one quarter hit. December and Thanks Giving related to challenges had been annual – that I think industry is tuned to. However, I think one point I want to mention, not in a cynical way but there have been series of challenges. Sometimes natural calamities, sometime geopolitical tensions or rioting in a particular city, unstability coming in city, so there has been a pattern growing for Indian IT industry. They need to think about how if one location is subscale or is not able to perform at, full throttle how do they plan the work to other location.
How they have a fungible skills, not for a Chennai scale of a challenge but when there is a challenge related to say rioting or geopolitical issues or terrorism related issues the locations come down. If the entire locations shuts down, especially locations like Pune or Bangalore then this has got the serious challenge. I would advise Indian IT companies to think about some strategy to plan this redundancy also in their disaster recovery and business continuity plans. Latha: Now after the December quarter industry will start talking about IT spends by the global majors. What is the sense you are getting for 2016 are IT spends likely to increase?
A: I have just completed a survey of 400 plus end-users organistaions across North America and Europe. We will be publishing our data in another 10 days or so for which typically happens for Indian fiscal 16-17. Initial sense is not very great news for IT industry. Firstly, the Budgets are very tighter, clients are concerned. We see several issues in Europe not only because of economy but also a whole lot of security concerns, there is a lot of a political issues evolving around refugees and things like that which is keeping governments busy and hence the industry is somewhat facing struggle especially in continent so Europe really is a challenge.
Asia-Pacific Economic Cooperation (APEC) growth rates also have little bit dropped so, that is one challenge. Second challenge is for services company – they need to not only compete against other services companies but they also need to compete against software as a Service (SaaS) providers some point solution companies. Companies such as Workday which offer a particular business service or offer a particular solution on a paper used bases. So, these days you don’t lose if your IT services company, you don’t lose a deal only to fellow service company, you may lose deal to a mobile app company or to a business service provider (BSP) provider. So, that is a second challenge.
I feel, this is again I must give disclaimer that this is an early trend but we feel that we will have to be ready for mid single digit 6-8 percent growth for FY16-17. We will publish our exact data in another two weeks time. Sonia: Is that mid single digit in revenues? Is that what you are talking about? A: 12-14 or 12-15 percent was 2 percent higher than our own estimate.
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