The tough economic environment in South Africa – seen through interest rates hikes – is going to be a drag on earnings of companies. That is why Business Connexion (BCX), a standalone unit of Telkom, is taking steps to face the economic realities of a downturn. By Gugu Lourie
BCX is implementing various cost-cutting initiatives to remain relevant and profitable. For more, read: “Extraordinary times hit BCX”
“For us to remain profitable and relevant, we have to look at our cost structure in response to the current market realities and how these impact our client base. This is particular initiative is not Telkom-led. It’s what a lot of people think,” BCX CEO Isaac Mophatlane told TechFinancials.co.za in an exclusive interview late on Friday.
“It’s facing your realities. There is definitely a slowdown in the economy.”
He warned that BCX’s management cannot be oblivious to the economic realities. “It can’t be business as usual.”
It’s getting tough out there for South African corporates.
Jabu Mabuza, chairman of Telkom, has already warned about the impact of a weaker rand.
Speaking to the Sunday Times newspaper, Mabuza said a weaker rand affects the price Telkom pays to buy equipment from international markets.
He told the newspaper that Telkom CEO Sipho Maseko is “frantically redoing the sums he did last year”.
So tough times lies ahead for Telkom, BCX and other technology firms.
The market downturn is already affecting BCX’s clients, such as mining houses. Global miners are seeing profits diminish amid slowing economic growth in China, the largest commodities buyer.
With other exogenous factors such as rand weakness, this is likely to affect technology firms, such as BCX, that provide software solutions to the mining industry and other related sectors. This will result in increased equipment and software costs and put pressure on revenues.
Mophatlane said: “Look, we got to react to the market and what’s out there. We’ve seen rand weakening, which means bringing technology into the country becomes expensive to our end user.”
Last week, Reserve Bank Governor Lesetja Kganyago raised a repo rate by 50 basis point to 6.75% and South Africans are bracing themselves for more rate increases in the coming months.
The International Monetary Fund has also cut its economic growth estimate for South Africa by almost half to 0.7%, attributing it to weak commodity prices and high borrowing costs.
Minister of Finance Pravin Gordhan may also increase corporate tax in his budget speech to be presented to parliament on 24 February 2016.
“We got to deal with our realities,” Mophatlane said, adding that there has been a slowdown in the mining sector, in which the company has a bigger exposure.
“The reality, of course, it would hurt to loose skills sets. It’s just that we have to box a lot smarter, but we can also not ignore realities.”
BCX is looking at consolidation of costs with Telkom around how to leverage each other’s facilities, contracts with technology vendors and procurement synergies.
Mophatlane said they are looking “at best practices and policies, where Telkom has better, we adopt theirs and vice versa. Maybe in realisation of cost savings and efficiencies and all that would probably have a better view in six months’ time, when we have executed on those we have identified.”
He reiterated that the Telkom deal with BCX wasn’t done on the basis of cost-cuttings, but “it’s just a natural progression. Its common sense for us. We’ve looked for synergies in terms of cost cuttings. We are consolidating our contracts with our suppliers.”
When asked whether the timing of the Telkom deal was perfect, Mophatlane said: “It’s a perfect time for the storm. I think certainly we did the deal at a right time. I think that just generally with the interest rate going up, raising cash is going to be a lot tougher and it doesn’t matter what industry you are in. We certainly made the right decision.
Mophatlane said he “would love to see” BCX being a significant contributor to Telkom’s profit line and to our customers in whatever we do.
“We got to drive this business that our acquirer and shareholders do see merit in justification of why the deal was done.”
BCX is the largest employer of ICT skills in Africa with close to 7 000 employees, who have vast experience in
delivering large projects on the continent.
Telkom has acquired BCX to bulk up its information and communications technology business in order to address the technology and communication needs of South African businesses nationally.
BCX has the potential to be the enterprise unit within the bigger Telkom Group.