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Rising Re leaves small IT cos gasping

By Ishita Russell in New Delhi
November 08, 2007 10:11 IST
With the US dollar poised to go below Rs 38 mark, the future looks bleak for the small infotech companies.

Even as the nearly $40 billion information technology industry is still trying to stabilise itself from the impact of the rupee exchange fluctuation, since most of their business comes from overseas, the roots of smaller companies have been shaken further.

"With the rupee appreciating to the extent of 13 per cent over the last year, the small companies are in trouble and it is a matter of great concern," says Nasscom president, Kiran Karnik.

As most of the businesses for these small infotech companies comes primarily from the US, they are most vulnerable. Constraints in finance too have impaired these companies from resorting to preventive measures.

"Hedging has been the biggest trend to cope with the appreciating rupee; however, the small companies have not been able to resort to this," says Avinash Vashisht of Tholons advisory.

He attributes this to the lack of financial power and instruments to be hedged. "Proper hedging and other measures of prevention can only come through guidance and guidance costs money, which the smaller IT companies cannot afford," he adds.

The size of the smaller companies is another deterrent in coping with the losses incurred. Unlike the larger companies, the smaller companies are not in a position to renegotiate the prices or billing rates. Despite initial turmoil, the mid-cap companies have also resorted to measures to lessen the impact of the appreciating rupee.

"We get all of our business from the US, but our sound financial policies have prevented serious losses," says Devendra Saharaia, co-founder and president, Ajuba Solution.

He adds: "We cannot renegotiate existing orders, but we will consider a different billing model and re-negotitate in case of new orders or renewal of orders."

Another mid-cap victim of the appreciating rupee was Noida-based  Rsytems, whose bottomline suffered to an extent of 8 per cent, as 65 per cent of its business comes from the US.

"We took steps like hedging, billing in a different currency, and renegotiating with clients to negate the effect of rising rupee." says Baldev Singh, president and senior executive director, R Systems.

A question mark however hangs over the future of the small IT firms, as the rupee shows no sign of providing any respite. Vashisht opines, "The business process outsourcing units, will be largely impacted, unless they provide niche services due to good margins."

He further says, "The IT software industry, on the other hand, is a relatively mature industry now, so the small companies face the threat of losing their business to the large companies."

The possibility of the smaller companies closing down or being acquired also looms large. "If the rupee continues to strengthen at a similar pace, then the smaller companies may be forced to sell out, leading to a consolidation in the industry by the latter half of the next year," says Vashist.

Karnik, however, opines that there is dearth of buyers also in the market unless the companies provide specialised services to add value to an existing service.

"The large companies will not be affected now, but the smaller companies need encouragement. We are also the government has to take measures to do so."

Ishita Russell in New Delhi
Source: source