The IT Paradox

One may be tempted to assume that the IT software and hardware companies go hand-in-hand with the technology growth story. But the one determinant that sets them poles apart, literally, is the rupee. While about 90 per cent of the revenues from Indian IT services firms come from overseas sources, above 80 per cent of the materials required by IT hardware firms come from overseas sources. The depreciating rupee though is not the only factor that has negatively impacted the hardware industry. This had been drastically affected by supply line disruptions caused by the Japanese tsunami and the Thailand floods sending prices upwards.

With this, the Indian IT hardware industry has been facing major issues since March 11, 2011. Since that date, the stock prices of companies in the sector have yielded a return in the range of -1.12 per cent and -63.79 per cent which is in perfect contradiction to the 21.72 per cent to 103.52 per cent appreciation in stock prices of software companies (mid-cap only). Due to the doubled cost of inputs, companies also tried hiking prices to pass a part of the burden on to end consumers but this was only followed by a drop in demand.

The companies have also suffered from contracts and tenders with the government that are time-bound and price-locked considering the fact that about 50 per cent of the IT hardware consumed in India is by the government. As such, MAIT (Manufacturers Association of IT) has urged the Ministry of Finance, Ministry of Commerce and Ministry of IT to take steps to save the industry from drowning. The suggested steps include:

• Implementation of the exchange rate variation (ERV) clause.
• Giving vendors an option to include the ERV clause in tenders that have been awarded and in implementation stage.
• Exemption of raw materials from CVD and SAD for the next four months to adjust for price escalations and currency fluctuations.
• Extension of the current 20 per cent abatement concession to 35 per cent for all IT hardware devices.

Of the majorly affected, these include most of the private players that operate on a large scale in products like laptops, printers, scanners and other consumer electronics. Recently in the news was China’s Lenovo Group that was reported by a local newspaper to have been in talks over buying a 50.1 per cent controlling stake in HCL Infosystems for about Rs 500 crore. These reports had HCL Infosystem’s shares shooting up by as much as 27 per cent. With both the companies under review unaware of such developments, the stock prices dropped by 9.36 per cent the next day. Talk about an already troubled industry going through speculative price fluctuations!