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Profitability of Indian IT services companies in times of crisis

A few days ago, I came across an article in the French It Mag commenting about the results of the Indian IT services companies which have been collapsing on a continuous basis since late 2007. Many of them have even registered losses. This information, except in the case of Satyam, still surprised me for the simple reason that the downward trend was even more staggering because these corporations had at one time posted incredibly high returns. Some have even shown 30% EBIT on hundreds of millions. The scarcity of customers in these times of crisis does not seem possible to explain totally this rapid fall.

I see several possibilities:

A dubious financial clarity in the past. It was necessary to raise money to finance these fabulous building projects. Then there was nothing left to show but a fantastic year end statement!

The cost of launching these multi million dollar projects. Someone must be familiar with the results of these companies and their debt in particular. I wonder what these investments represent in terms of their actual over-head.

They are extremely sensitive to the parity rupee – dollar and the new downward movement could again hurt badly the Indian economy. Everything that is imported to the USA is becoming more and more expensive, and this is profiting the local American production.

But anyway, the current drop is not consistent with the declining profits of U.S., Eastern and Western European companies, which share the same customer base. They are not in the process of undergoing a shift from +30% to -10! The most profitables-ones will go from 12% to a balanced financial statement and the worst performers will go from 3% to -5%. In short, the decline in profits will be limited to less than a dozen points.

It remains to be seen whether the dire predictions of this article will be confirmed or not, sweeping aside in the latter case the value of this short note.