Software: R&D - slow outsourcing - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Software: R&D - slow outsourcing

Feb 17, 2003

Not so long ago, the top rung Indian software companies could be divided into two groups. One that focused on technology solutions and the others that were more focused on business related solutions. At one time, revenues from the telecom vertical were taken as an indication of the company doing high-end work. However, post the technology meltdown, the same is being termed as ‘exposure’, very much the same way that dot-coms are referred to today. While Wipro and HCL Technologies belonged to the elite technology solutions provider group, Infosys and Satyam chose to focus on business related solutions. The investor community, including us, held the companies focused on technology solutions in awe. The strong investment positives were the higher barrier to entry and secondly, with revenues coming from the R&D budgets of their clients, spends were less prone to being lowered during tough times.

However, we are a lot wiser now. The revenues from the technology domain were the worst hit. This is evident from the fact that the domain’s contribution to revenues for HCL Technologies came down from 44% of total to 31% of total, a decline of 18% in quarter ended December 2002. Wipro had a similar story to tell.

Company (Rs m) Quarter ended
December 01
Quarter ended
December 02
HCL Technologies      
Revenues from R&D services 1,766 1,451 -17.8%
% Contribution to revenues 44.0% 31.0% -
Revenues from R&D services 3,105 2,831 -8.8%
% Contribution to revenues 51.0% 38.0% -

The reason for the steep decline in revenues from the technology segment was the troubled telecom clients. The telecom companies can broadly be classified into the telecom equipment (or box) manufacturers and the telecom service providers. The box makers make equipments that move data and voice from one end of the globe to the other in absolutely no time (like routers and switches), while service providers buy these equipments and provide telecom and/or internet services i.e. move data and/or voice (like MTNL and VSNL in India). During the technology boom, as Internet opened new business possibilities, these companies set up huge capacities, committed significant amount of capital and now, are not finding many takers for their products and services. Consequently, their financial statements are looking really ugly. Both the segments of the industry are victims of their irrational exuberance.

However, one hopes that the imperative to bring in customers profitably using new technologies would force companies to outsource R&D work to Indian vendors. Thus, the development costs of new technologies would become lower. Telecommunication technologies have been one of the most dominant forces shaping the face of mankind in the recent past. Business models have evolved around newer possibilities offered by these technologies, and will continue to do so. Thus, the software companies that have competences in this domain are likely to see a lot of business coming in.

However, the growth could be much slower than expected. Many of these companies have chosen to establish their own R&D set up in India to lower costs. This would to a certain (and probably significant) extent lower the quantum of business that is expected to be outsourced to the Indian IT services companies. Further, functions like R&D provide the edge to companies against competition. Thus, sharing technical know how that is almost critical to survival would be something that the global companies may not be very comfortable with. The list of global technology majors that have set up R&D outfits in India include Motorola, Intel, Cisco and Texas Instruments.

In FY02, about 7% of the total software exports came from R&D services. This translated to a growth of 4% from this segment, significantly lower compared to a 19% growth posted by the IT services industry as a whole. While slowdown in the telecom industry was the main culprit, technology majors choosing to do it on their own, may also have contributed to this. Thus, the growth in revenues from R&D services is likely to be much sober. Meanwhile, Wipro’s acquisitions of Ericsson’s R&D centres in India and Hughes taking Lucent’s development team into its fold, shows that the Indian software companies are trying even harder to get a larger share of the pie.

Equitymaster requests your view! Post a comment on "Software: R&D - slow outsourcing". Click here!


More Views on News

If You had Invested Rs 1 Lakh in TCS in 2011, this is how Much You Would have Today (Views On News)

Nov 30, 2021

Did TCS perform better than the market and its peers?

India's Top 4 IT Companies are Struggling. Here's Why... (Views On News)

Oct 22, 2021

As attrition rates are unbelievably high, top Indian IT companies are going for big-ticket raises, and much more hiring this year.

Infosys had an Exceptional Quarter Buoyed by Huge Deal Wins. Revenue Guidance Boosts Stock (Views On News)

Oct 14, 2021

Infosys raised its forecast for annual revenue growth to 16.5-17.5% from the earlier 14-16%, predicted in July 2021.

Info Edge: The Anatomy of an Indian Internet Behemoth (Views On News)

Oct 2, 2021

Info Edge is very popular in the Indian startup ecosystem due to its active participation in funding events.

This Indian Company is Tapping into the Huge Autonomous Driving Opportunity (Views On News)

Sep 14, 2021

Despite many challenges, Indian companies and startups have not shied away from entering this space.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

India's Top 5 Monopoly Stocks to Watch Out for (Views On News)

Nov 30, 2021

These 5 companies dominate their sectors with a huge piece of the pie.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Dec 3, 2021 (Close)