Alok Shende heads the Telecoms and Technology Practice for market analyst Datamonitor. I know the Datamonitor call centre and BPO expert Peter Ryan (based in freezing cold Canada) and he sent me a Facebook message just before the conference saying I should chat to Alok. When I was lining up to fetch my badge at the very start of the NASSCOM conference I said hello to the guy standing next to me, and it was Alok. Given the number of delegates at this conference it can be hard to find people you have never met before so that was a serendipitous greeting.
So we worked out a time to go and catch up together over a cup of tea and to see what he was thinking of the activity at NASSCOM this year. Alok started by saying: “This is the four or fifth time that I am here at NASSCOM. It’s a great networking event. I am here because you are here and you are here to meet me and he is here because of someone else. It’s just great meeting people here. There are some great speakers as well. At most events you go ‘wow’ on the first day and it tails off towards the end, but this event has really good people well spread throughout the three days.”
I asked Alok about some of the international economic uncertainties at present, and in particular the pressure many Indian companies have suffered as the USD/INR foreign exchange rate has become considerably less favourable. It’s important as many of their costs – such as salaries – are in rupees, but they bill their customers in USD. If the dollars start becoming less valuable then they cannot just ask the customers to pay more, it erodes their profit margin.
Alok explained some of his thoughts to me: “There is a challenge for the future. Everyone wants to know what is going to happen, and particularly the mid-tier companies. They get invited to all the same deals and can’t compete for the deals the big guys go after (the companies who are about $1bn or more in revenue). NASSCOM has about 800 member companies, but that is still not every company in the sector so we are not even seeing the effect on everyone here.”
I was particularly interested in the effect on profit margins in India and Alok said to me: “If you move from 33 per cent profit margin to 27 per cent then investors start rationalising their assessment of your future earning potential. You can see this concern being expressed by a lot of people in the industry. Future expectations can easily be changed very quickly. With this in mind I think there should be a wave of consolidation in the mid-tier of this market. The only question is when.”
So, Alok believes that the smaller profits are going to make it harder for smaller companies to compete. It’s interesting to see him observe that some mergers of service companies will be inevitable in India. I was interested to ask a little more about the margin erosion though. I did an MBA myself and I had to scan through company balance sheets, but to be honest I never found that kind of analysis the most interesting part of my course. I wanted to ask Alok why it’s such a big deal. I mean we are moving from a situation where companies have enjoyed fantastic profit margins to healthy margins. It’s not as if they are being forced to survive on wafer-thin margins, or even selling services at a loss. Alok explained the situation to me: “The thing is that margins are not linearly related to the company valuation. So a 5 per cent drop in profit margin is not going to lead to a 5 per cent drop in company valuation, the value of the company might drop by 20 per cent or more - this is the sort of drop in value we have seen for some of the Indian technology suppliers recently. The second concern is how these companies can really differentiate and transform what they are offering, to pull out of this situation and show they are different. Many of the companies in the mid-tier are really struggling with this question.”
I think Alok makes some interesting points and it’s great to get some clarification on the margin issue. He also mentioned to me that his company has observed some strong activity in the market in January 2008, so business in the Indian marketplace is growing. Some of those mid-tier and smaller companies might need to think about what Alok has said though, in a busy marketplace how do you look different to everyone else?