Lehman Brothers' bankruptcy filing may well prove to be the last straw for Indian IT firms, which were expecting the second half of FY09 to be better. As a result of the United States' financial market crisis, analysts do not expect Indian IT firms to sign any significant contracts in the banking, financial services and insurance space in the months to come.
While IT firms do not disclose client-specific details, it's estimated that Lehman Brothers has outsourced deals amounting to anywhere between Rs 550 crore and Rs 700 crore (annually) to numerous IT firms, including majors like Tata Consultancy Services, Satyam Computer Services and Wipro. Lehman Brothers, say sources, works with 14 services providers in India - Wipro and TCS being the largest. It also has investments in a few IT firms. It's not clear if these holdings will be liquidated to raise funds.
Moreover, the sources add that Lehman Brothers' captive unit in Mumbai has issued termination letters to a majority of its 1,500 employees. The captive unit provided support and financial process outsourcing to the company. It's estimated that Bank of America's buyout by Merill Lynch, too, would have some adverse impact. BOA, which has a captive in Hyderabad, also has deals with many Indian IT-BPO companies. Its consolidation with Merill Lynch could result in duplication of outsourced IT deals to Indian firms and, consequently, truncation of the deals that will result in loss of revenue.
"Consolidation could result in a significant reduction in IT spends, though it won't happen overnight. The process could be spread over six to nine months," explains Avinash Vashishtha, CEO and MD of Tholons.
"We don't see any major challenge for providers in the short-term. But in the mid-term, it would result in the reduction in the quantum of work outsourced to services providers," concurred S Sabyasachi, senior director, neoIT, an offshore advisory firm. Pain in the BFSI segment results in re-negotiation of pricing, basically from those clients who were badly hit by the subprime crisis and slowdown in the US.
Moreover, there is bound to be a further lag in the settlement of deals since it's a US election year and offshoring to countries like India remains a politically sensitive issue, notes Vashishtha.
"We are very concerned about the recent development in the BFSI sector in the US. However, the Lehman Brothers episode will not have any impact on Satyam. Though they are a customer, they contribute to a very small proportion of our revenues," said Srinivas Vadlamani, CFO, Satyam Computer Services. TCS offered no comments. Wipro is said to be assessing the impact. "We have little or no exposure to Lehman Borthers. Besides, our exposure to the leading banking and financial companies in North America is minimal," said Prem Kumar S, vice-president (financial services), HCL Teachnologies.
Ganesh Natarajan, chairman, Nasscom, says, "Lehman Brothers' captive centres in India will get affected. Anything related to the BFSI sector, which is already dull, will be impacted for the next six-12 months. There will be no impact on the sector in the medium term. Though there will be no cascading effects of the company filing for bankruptcy, but the stock market will respond in the next three days. The market-related recession will impact the sector in the long run."
Investors, however, reacted sharply to the news with the IT index dropping over 5 per cent for the major part of the day's trading to close 5.51 per cent lower on the Bombay Stock Exchange.
IT firms' margins have already been affected by the continuing US slowdown (since the region accounts for almost 60 per cent of their revenue). When declaring their April-June quarter results for FY09, all IT firms expressed "caution over the global business environment" besides "...a fair amount of pain in the US" as Azim Premji, chairman of Wipro put it. The US and UK generally account for over 85 per cent of the business for most IT firms.