Dip in IT cos' margins inevitable: Rakesh Jhunjhunwala

Rakesh Jhunjhunwala, Investor and Trader feels that the US subprime crisis has been creating a pressure on IT companies’ margins, adding that dip in margins for the IT industry is inevitable.

Rajeev Malik of JP Morgan Chase Bank feels that the overall economy slowdown is going to be less pronounced than what it is for the IT sector.

Both were speaking at a conclave on the ‘Subprime Crisis in the US’ and its impact on India organised by the CII, Bangalore.

Excerpts from questions asked by Rakesh Jhunjhunwala to Rajeev Malik at the CII Conclave:

Rakesh Jhunjhunwala: There is pressure on margins. If IBM today, in the service industry, is getting 10-11% margins, how long will the Indian Industry do business at 30%? So according to me, the dip in margins is inevitable.

Rajeev Malik: That’s true; but to what extent? You would also integrate that to how long can IT continue purely on employment dimension locally, as opposed to start looking at cheaper alternatives. Philippines is a place that’s increasingly coming into the press, purely in terms of diversification. Now one can say that’s a natural process, but you can’t disagree that it does have an employment impact locally.

Rakesh Jhunjhunwala: My concern is, as an investor, I may now invest in IT stocks but if there is a slowdown in America, what happens to the other sectors of the economy? CII has made a very good report of how vital this software industry is to the Indian economy.

Rajeev Malik: Precisely, which comes back to the point I was making, that there is a cyclical component to your argument. Overall economy slowdown is going to be less pronounced than what it is for the IT sector. This is simply because India is not that opened and IT sector’s exposure to the US is much greater than the exposure of the overall economy. Short answer to all of this is, yes, it is a negative sign.

Rakesh Jhunjhunwala: It would affect the economy?

Rajeev Malik: It would, most certainly. I think the best indication of that would be that in New York, a few days ago, Mr. Chidambaram actually talked about a downside risk on growth; but he was talking more from the rupee appreciation dynamics side. But again, it is coming back to the same issue.

Rakesh Jhunjhunwala: Why are you concerned? The Yen went down from 400 to 120 to the dollar, but they are still exporting…

Rajeev Malik: Yes, they are. But perhaps you are forgetting what that did to Japan!

Rakesh Jhunjhunwala: But that is a boom burst, we don’t have that kind of a boom here…

Rajeev Malik: We have a boom; it may not be that kind!

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