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BFSI meltdown calls for new steps

Even as the U.S. Government has put a rescue plan in motion to tackle the financial crisis, and central banks globally have pumped in huge funds into the system, there is still a large uncertainty in the minds of the people. “Fear” is the word that explains the emotion, which people across the world are going through. The impact of the crisis is likely to cut across industries and geographies. Hence, everyone is nervous.

For the IT industry, such crisis would impact its growth plans and volumes, as the BFSI (banking, financial services and insurance) sector is one of the major contributors of revenue. The pain in the U.S. financial sector continues and, hence, there could be some uncertainty on the growth prospects in the near-term for this sector.

Industry sources say that the growth in BFSI vertical would be lower than the company growth. It is expected that sectors such as retail and transportation may also be impacted due to differential spending behaviour of consumers due to high inflation and credit crunch. For IT services, the broader market is not different from the earlier scenarios but the cascading effect on other verticals and geographies needs to be evaluated cautiously.

The overall exposure of Indian IT companies to the BFSI space has been around 40 per cent of the total revenue of $31.4 billion (excluding hardware exports). The contribution of other verticals to total revenue is: hi-tech/telecom (19 per cent), manufacturing (16 per cent), retail (8 per cent), media, publishing and entertainment (3 per cent), construction and utilities (4 per cent), healthcare (3 per cent), airlines and transportation (3 per cent) and others (4 per cent).

However, the exposure of five major companies — Cognziant, TCS, Infosys, Wipro and Satyam — was significantly large. During April-June 2008, Cognizant recorded the highest growth from financial services vertical among the offshore peers. This was mainly due to the type of financial services clients in the portfolio and the multiple operating levels.

Despite strong performance by the financial services sector, the Cognizant management had taken a cautious view of the overall market (see Table). Francisco D’Souza, President and CEO of the company, said in a conference call (held on August 1) with financial analysts “When we look at our actual results in the second quarter, the good news is that our financial services portfolio saw an improved stability, actually growing slightly above the company average on a sequential basis. However, as the quarter progressed, we began to see the impact of the economy, affecting clients across other industries. While this trend was most clearly evident in the healthcare segment, anecdotal evidence that we have from conversations with customers outside of healthcare and financial services indicated that the effects of the slowing economy will affect other industry groups during the latter half of the year.”

Shiva Ramani, Chief Executive Officer, Cybernet-SlashSupport (CSS), has clearly indicated that the industry would see a consolidation in the IT/ITeS sector this year.

Some vendors who have lesser exposure to the BFSI space will gain and those with significant exposure will be impacted. The overall impact of this crisis will be felt over the next 2-3 quarters rather than immediately. The overall revenue impact on the IT and ITeS industry, as a result of the BFSI meltdown, could be anywhere between $750m and $1 billion.

Srikanth. R., Executive Vice-President and Chief Financial Officer, Polaris Software, feels that when such crisis happens, large businesses respond by re-prioritising their initiatives and put a stay on some of the planned projects. The focus for the next couple of quarters shifts to improving efficiencies by maintaining the existing operations at a lower cost. The present situation emphasises the need for a strong risk management strategy to sense and avert systemic failures. Not just BFSI, other sectors too will be cautious on their IT spend. So far, the growth rate of the industry has been around 25-27 per cent. “I will be happy if it does 15-17 per cent this year,” says Phaneesh Murthy, Chief Executive Officer, iGATE Corporation.

Companies would be focussing on just-in-time hiring with supply-side situation having eased considerably besides working on non-linear initiatives to improve efficiency and productivity, say sources familiar with the trend.

According to Mr. Shiva Ramani, the job loss due to the current crisis could be anywhere between 15,000 and 25,000 in the Indian IT industry over the next six months (October 2008 to March 2009). “The industry could see a move away from ‘hiring-in-advance’, says Mr. Shiva Ramani.

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