The Future is Uncertain
CRN’s mid-year review of the state of affairs in FY2008-09 finds that while the first half has been in line with the channel’s expectations, the second half looks rather gloomy
By K R Nambiar
 On the whole, the last six months were more than satisfying for a large number of channel partners in the country. Most of them feel that business has been good, or even better than expected. However, as major economies slip into a slowdown—and maybe even a recession—there are elements of fear, uncertainty and doubt in the minds of channels leaders regarding the next six months.
The first half of fiscal 2008-09 was quite eventful for different reasons. In April 2008 recession was merely speculated about. In September 2008 it was almost confirmed, at least as far as the US economy was concerned.
In April, partners addressing export-focused industries were worried about the dollar weakening against the rupee. They were projecting a slowdown in their business because their customers were finding it difficult to be profitable.
In September, some of them were still worried (despite the dollar strengthening against the rupee) because the same customer base was now projecting lower business since many western economies are in turmoil—which translates to lower investments in IT.
Enterprise Scenario
Of the partners addressing the SMB and enterprise markets, and those of whom CRN spoke to, most expressed immense satisfaction in the business gained in the first half of the year. System integrators (SIs) and solution providers (SPs) CRN talked to reported an average growth of approximately 20 percent compared to the first six months of the last fiscal.
“We have done exceedingly well in the first half of the year, and according to our knowledge, many of our peers are also not complaining,” comments A L Srinath, CEO of the Hyderabad-based Shell Networks. “However, what’s in store for us in the next six months is a million-dollar question.”
Some of the pessimistic reports in the press have already started comparing the impending situation in the US to the Great Depression of the thirties, while the more optimistic reports suggest that it will be the worst depression to hit the US in a quarter century.
“There is no doubt that the situation in the US will reflect on the Indian economy. I feel that the real impact will be felt only three months from now,” opines Navin Kapur, Managing Director of Iris Unified Learning, a Delhi-based software solution provider.
Industry pundits feel that since it is the election year in the US, the worst news will be left to the beginning of the next year when the new president takes over.
Says K V Jagannath, CEO of Hyderabad-based systems integrator, Choice Solutions, “We were quite positive about the market situation till a month back. In fact we had a great first half with our revenues growing well over 50 percent. There will no doubt be some difficulties in the days ahead, but I am still bullish that with the right strategies we can overcome the issues.”
The first signs of a cash crunch were felt when many enterprises, during the first quarter of the financial year, insisted on shifting 30-day payment terms to 45 days and later to 90 days. “This movement was the first signal. However, we feel that by spreading yourself wide and engaging with smaller customers—whose payment terms are better—you can still offset the credit squeeze,” says Jagannath. Choice has already taken steps to handle any potential slowdown. This includes staying away from some of the MNC vendors, where margins are likely to be lower, and increasing their share of business from services.
Many partners report that there are delays in sanctioning fresh projects, and decisions are being postponed by quarters by enterprise customers. “Already we have seen quite a few customers postponing and even dropping investment plans,” notes Arun Kumar Gupta, CEO, Darts IT Networks, a Delhi-based network integrator.
Meanwhile, Shell Networks has decided to lessen its focus on some of the emerging technologies while pursuing segments such as manufacturing and education for the next six months. “A few projects have already been delayed, so, following the advice of vendors such as Cisco, we have started focusing on education, where there are a number of projects in the pipeline that are less likely to be scrapped or postponed,” reveals Srinath.
The weakening of the rupee against the dollar has affected a number of partners. Jagannath tells how: “Enterprise projects, including purchases, are always budgeted by customers. It is difficult to stretch the budget of the customer once it’s planned because fresh budgeting could delay projects by over a few months. Many projects were planned and proposed in April when the US dollar was hovering around Rs 39. Now with the dollar at Rs 48, we are forced to cut down our margins to fit the project costs within the budgets allotted by the client. Most SPs will be cautious, and will not ask a customer to re-budget fearing that they might delay the project or even put it off.”
Tightening the purse seems to be a reflex action for many partners. “We have frozen our recruitments till there is definite improvement in market forecasts,” states Gupta of Darts. But both Srinath and Jagannath plan to continue recruiting. “This is the right time to invest in manpower because good talent is always available at realistic salary,” observes Srinath.
Some of the partners are also planning to invest. “During the last recession we took advantage of lower market rates and acquired our own office premises,” explains Francis Laser, CEO of Bangalore-based Absolute Infotech. “This is the right time to invest.”
The biggest worry for most SPs and software resellers is the government’s decision to impose service tax on the licenses of all packaged software. Since service tax is being levied, customers also cut the TDS which essentially renders most transactions negative. “While on paper we can hope to get back the TDS cut, it is impractical because the profits we make are low, and therefore our tax liabilities are even lower. Hence there is no way a mid-sized software reseller will claim the TDS amount,” says Prabhakar Kini, Managing Director of Kinfotech, a software reseller based in Bangalore.
SPs are trying to resolve the matter legally, though the support from larger software companies is minimal. “The situation will help larger Indian software vendors who are also increasingly focused on the Indian market. They have huge revenues and hence can reclaim the TDS amounts due. For this reason we are not getting the right support from the bigger Indian SIs since the current situation is in their interests,” analyzes Kapur. “If the situation persists, we may see many mid-sized channel partners going out of business.”
Nevertheless, there are several positives that the industry sees from the second half of the fiscal. “The situation in the US has meant that American customers are looking for even cheaper alternatives. Companies like ours can offer services at lower costs than an HCL or a Wipro. I am already seeing interest from some customers who want to work with smaller Indian SIs,” discloses Gupta.
Distribution Scenario
The first half of the financial year was positive for most of the distributors and sub-distributors CRN spoke to. While the growth rates projected were between 10 and 20 percent over the first half of the last fiscal year, many sub-distributors complained of a weak September.
The impact of a potential recession in the US has not yet made a major impression on most sub-distributors. While all sub-distributors feel that the margins in the business are low, most of them also feel that it has generally remained stable over the past two years.
“Most in the sub-distribution business have adapted to the rules of the game, and have now learned to do business according to the nature of the business. Hence, whether it is discounting based on back-ends or cross-selling based on demand, sub-distributors have managed themselves very well,” comments Ramesh S, Senior Manager of Ralco International, an independent distributor.
Decision by distributors to increase freight costs is a matter of concern for most sub-distributors. In July this year, distributors such as Ingram and Redington announced that they would charge between Rs 75 and Rs 600 as door delivery charges. They also announced freight charges based on the invoice value. “We have also seen our inter-branch stock transfer costs sky-rocketing because transport costs have gone up,” informs Narayan More, Finance Head of the Bangalore-based sub-distributor Sogo Computers.
Most sub-distributors have started reaping benefits from their investments in ERP and other automation systems. “Our credit control over the last year has improved, thanks to our fine-tuned ERP implementation,” states More.
Most sub-distributors also said they had improved their systems for credit-rating resellers. “We have a very personal-driven credit system, with local sales managers having complete control over the system. It helps us in identifying the right partners to extend credit to,” says Umang Lalani, Director of the Kolkata-based Lalani Infotech.
The biggest worry for distributors and sub-distributors was the diversion of money, by partners, from the channel business to the share market and the real estate market. “Since the money markets are down, and the liquidity crunch is severe, it is a matter of concern whether some of the partners will be able to bring their money back into their business during the difficult days ahead,” says R Madhav Chandran, CEO of Cyberland Technologies which is based in Kochi.
While many resellers and even sub-distributors realize their folly, and are looking at re-investing in their business, current market conditions do not offer them the liquidity to do so. Even so, some feel that since the stock markets are down it is likely that more money may return to the business.
The distribution business looked healthy except for the fluctuating dollar, which has forced some distributors who had not planned for a weakening rupee to take a hit.
“We are still bullish about the market. We have just received an investment in our company, and are hoping to have a year-on-year growth of 100 percent,” says Vijay G, Director of the Bangalore-based Inflow Technologies, a value-added distributor.
Retail Scenario
Retailers CRN spoke to, offered mixed opinions regarding the last six months. While city-based retailers were concerned about losing market share to large format retailers, retailers in smaller cities paint a prettier picture. “We are doing extremely well. We have seen remarkable growth in the past six months, and are selling over 300 laptops a month,” informs Shyju Antony, Director of the Kochi-based Online IT Shoppe.
Most retailers benefited from the weak dollar in the initial months as PC prices plummeted and there was a surge in demand for the products. But the sudden 20 percent increase in dollar price has meant increase in MRP and thus reduced demand and margins.
The steep rise in rental costs has been a detour for both large city-based retailers as well as smaller town players. “We hope the imminent slowdown will bring a correction, and we are waiting for this to happen to make future investments,” informs Dinesh Nair, General Manager of Sogo.
The road ahead
Most SPs and SIs are cautious about the coming days. Still, many of them also see it as an opportunity to acquire talent. Sub-distributors are concerned about possible credit crunches and the diversion of funds from the market, and are hoping that money will return as other investments slow down. Retailers, at least in smaller cities which are less dependent on the export markets, expect a better second half. |