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Software exports: Tough times ahead? - Views on News from Equitymaster
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  • Jan 5, 2001

    Software exports: Tough times ahead?

    The National Association of Software and Services Companies (NASSCOM) has revised its forecast for software exports in FY01 to Rs 285 bn (US $ 6.2 bn) from US $ 6.3 bn earlier. According to NASSCOM, the marginal revision was due to devaluation of the rupee.

    Considering the fact that most of the software companies earn in US $, devaluation of the Indian rupee has generated additional revenues for these firms. Many software companies including Infosys have seen a jump in other income figure.

    For example, Trigyn, for 2QFY01 has a huge component of other income (Rs 40 m) in its net profit (PAT). If this is removed the company’s PAT has fallen (down 40%) compared to the previous quarter. According to the company, this other income is due to profits from forex fluctuations and the rest are earnings from interest.

    However, the actual reason for revision in export figures could be apprehensions of a US economic slowdown. But Mr. Devang Mehta, President, Nasscom stated that he did not foresee any slowdown in the software sector. On the contrary the export figures is expected to accelerate in FY02 (presently, 56% of the software exports revenues come from the US).

    Rs bn Exports Domestic Total US $ bn
    FY02 440 160 600 13
    FY01E 285 110 390 8.6
    1HFY01 131 40 171 3.8
    1HFY02R 154 70 219  
    Required growth rate
    over previous half
    18.0% 75.0% 28.0%  

    There are a lot of theories as to what will be the impact of the economic slowdown. According to Mr. Premji, Chairman, Wipro, the share of the Indian companies to the US software markets is so small that there will not be any effect.

    According to those who feel there will be an impact, one group feels that lower rung Indian software companies might be affected (as smaller companies in the US will feel the pinch first). Another group feels that the US companies will shift to those Indian companies that offer cheaper billing rates.

    Unconfirmed reports, Patni Computer Services getting Wipro’s GE account could strengthen this theory. But then if this theory is to be believed most of the Indian companies offer billing rates 45% lower than their foreign counterparts. This would mean that they could gain on lost business of those companies

    According to a survey by Morgan Stanley on IT spending at large US companies, 74% of the companies survey had not changed IT budget plans. The survey included 150 CIOs (chief information officers) from 1,000 of the largest US companies. About 16% planned to spend less on IT next year, 12% had already reduced their spending and 14% would adjust their spending depending on macro-economic conditions, waiting for the second half of next year to spend the majority of their budget.

    The most important conclusion of the survey was that IT spending would likely to grow at 8% in 2001 compared to 12%. A part of the increased spending this year could be attributed to the dotcom craze, which will definitely not be seen for sometime.

    IT spend is a very generic term it includes both hardware and software. If the companies saw a fall in revenues due to an economic slow down (with interest rate cuts this possibility itself is in question now) then best place to cut costs would be logistics. E-business is a very good solution to this problem. Therefore, not only would the markets for e-business software pick up, this would also generate an urgent requirement for systems integration. The e-commerce sales software that includes order/catalogue management, configuration and personalization software has to be integrated with others namely ERP (enterprise resource planning), SCM (supply chain management) and CRM (customer relationship management) software.

    IDC is forecasting a 255% jump worldwide for middleware and business software revenues. This market will be around US $ 9.7 bn in 2004. IDC believes the biggest opportunity in the market rests with businessware management systems. U.S. vendors are benefiting the most from the overall middleware and businessware software market. In 1999, they captured almost 75% of worldwide revenues. North America produced almost 50% of the market's revenues. In 1999, this segment was the largest part of the overall market with US $ 673 m in revenues. In addition to being the largest segment, this market will grow faster than any other. Its revenues will increase at a compound annual growth rate (CAGR) of 51% from 1999 to 2004. In comparison, the overall market will increase at a CAGR of approximately 29%.

    The other growth driver in the area will be telecommunications software. Last year e-business was a major revenue driver for the Indian software companies. E-business will be continues to generate a steady stream of revenues. Infosys had 30% of 2QFY01 revenues coming from this area. Wipro had around 30%of its enterprise applications group’s revenue from it. The global market for e-business software solutions is expected to be around US $ 16 bn by 2004.

    Of course it is premature to be definitive about the impact. The onsite billing rates may be affected due to the slow down. The offshore billing rates will not see much of an impact. Indian companies are already looking for markets other than the United States. Indian Companies are looking at new markets like Australia, China and Africa other than existing markets like Europe and Japan.

    The recent paranoia regarding the future growth rates of software industry was totally uncalled for. Also common sense says that companies cannot grow at rates over 70% forever. The sector, more than anything has offered not only quality solutions but has created a name in the area of technology that was traditionally a forte of the west. It unfair to doubt the ability of the Indian software companies like Wipro and Infosys, to overcome something like the US economic slowdown. If there is to be concern, it is justified for the “jump the bandwagon companies” whose sole motto is to make hay while the sun shies.



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