To Let or Not to Let
The Indian IT rental trade is witnessing a major deceleration due to slowdown in the economy
By Priyanka Chowdhury
 The rental market for IT products, which had been on an upswing over the past few years, is witnessing a major deceleration due to the slowdown in the economy. In 2007, the rental business was estimated to be in the range of Rs 130 crore-140 crore, but in 2008 it is expected to register a negative growth of 30 percent.
Says Kshitij Puranik, Corporate Business Head, Ralco Synergy, “Our quarterly average was around Rs 2.5 crore at the beginning of the year. However, with the slowdown, we have seen a drop of 30 percent. This is mainly because of the business slowdown experienced by small and mid-sized IT and ITES companies. These companies usually rent IT products for new short-term projects, but they have suffered due to the crisis in the US economy. As a result, they have laid off several employees, and hence they have many PCs lying around which they can use instead of renting. We are afraid that if the slowdown continues we will not be able to sustain our business.” Ralco has been in the hiring business for over eight years. It rents out not only PCs but also routers and switches.
Bangalore-based Sogo Computers has also seen its rental business adversely affected due to the slowing down of the IT sector. “The IT and ITES segment has been the worst hit due to the recessionary trends in the US and European economies. This is one reason why rental markets in technology hubs such as Bangalore, Hyderabad, Pune, Chennai and Gurgaon, which are significantly larger than those in the rest of the country, have been most affected by the slowdown,” explains Dinesh Nair, General Manager, Sogo Commercial Services, the IT rental wing of Sogo Computers. Sogo has been in the rental industry since 1994, and provides laptops, desktops, peripheral products, LCD projectors, plasma TVs and UPS solutions.
Another big consumer of rented IT products is the financial sector, which has taken a big hit due to the global economic uncertainty. Hired products are in demand by financial entities such as banks, brokers and distributors during IPO of companies, and by mutual funds for managing IPO applications and processing. The IPO market, which was at its peak last year, has seen very few IPOs this year because the stock markets have been reeling under heavy losses.
Sharp fall in prices
Due to the drop in demand, hiring charges have also taken a big hit, thus eroding the margins of the players. According to Nair, “There has been a fall of around 30 percent in hire prices of almost all IT products. For instance, the rentals of desktops used to be around Rs 2,500 per month; it now has come down to about Rs 1,700. Similarly, the prices of routers, laptops and other IT products have also come down. Rates could fall by another 15 percent in the coming months.”
Complains Arun Kumar, CEO of Compulease Networks, which hires out networking and server products,“We have seen a drop of 60 percent in the rental prices of routers and servers. At this rate, we will not be able to recover even the cost of the product.”
Rationale of rentals
Prior to the slowdown in the rental market, the business was considered lucrative. “Hiring has been a very profitable business. You could make twice the margins you made on hardware reselling. Usually you recovered the cost of the product within the first four to six months,” reveals Kumar.
SMBs or software firms often prefer to hire products because capital is saved by hiring equipment instead of buying it, and the saved funds can be deployed for other purposes. Further, rentals give enterprises which are heavily dependent on technology the flexibility to scale up or upgrade every time a new technology is launched. There are also certain companies whose IT needs are project-driven, or they take up contractual work. “Since these organizations take on short-term projects, they prefer hiring equipment to purchasing it,” says Kumar.
Adds Nair, “For many customers, asset control is the main reason for hiring products. Some companies, especially MNCs, go by stringent government rules which insist that they cull away their computer hardware by following strict environment guidelines. This forces them not to resell the hardware. Hence, from both a financial and environmental point of view, rentals make sense to these organizations.”
Many event management companies rely heavily on rental solutions because they have to provide IT equipment such as notebooks, projectors and touch screens for various events including exhibitions, road shows, seminars and conferences. “On the whole, hiring IT products make sense for many organizations as it not only turns out to be economical in the long run but also saves the organization the hassle of appointing more people for maintaining the product and then disposing off the equipment at the end of its life-cycle,” explains Puranik.
Combating slowdown
As a way out, IT rental companies are looking at opportunities other than software companies. They are now turning to organizations providing corporate training, and event and exhibition firms.
“At the moment corporate training is growing faster than the retail training market,” points out Nair. “Less than five percent of companies have the infrastructure for training. Events are another segment that has opened up. Almost all events and conferences are being automated for the benefit of delegates, so event managers end up hiring number of computers, and this gives quick and substantial returns. We are also trying to push our services into the SMB segment.”
Concludes Kumar of Compulease, “It’s not just about pushing your equipment to a different segment. Now that the market has reached such a state, one has to be innovative and look at value addition. One can look at other smaller segments such as cyber cafes, web development and design firms, and computer training institutes, where there is a constant need for IT products.” |