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Software: Holding margins for now - Views on News from Equitymaster
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  • Feb 18, 2002

    Software: Holding margins for now

    According to Nasscom, the software and services exports for 3QFY02 totaled to Rs 91 bn (US$ 2 bn). This translates to a 2% sequential growth in topline. The growth on a YoY basis was 25%. For the 9m FY02, the sector has grown by 30%. However, since the 4QFY01, it had shown a strong sequential growth of 17%, which is very unlikely for 4QFY02. The sector is expected to clock 27% growth in exports for the full year FY02.

    The top rung software companies had a tough time in 3QFY02 due to the fact that two major verticals that contribute a large chunk to their revenues are going through difficult times. At one end is the telecom vertical that is facing weakness in demand due to the over capacity in the industry and weak demand from consumers in wake of the economic slowdown, The other key vertical, the BFSI (banking, financial services and insurance) could have shown weakness due to impact of the Sep 11 attack. Most of companies were affected in one way or the other, as the attacks took place in the heart of the financial district in New York.

    Revenues (Rs m) Quarter ended September, 2001 Market share Quarter ended December, 2001 Market share Change
    Infosys 6,501 7.3% 6,608 7.3% 1.6%
    Wipro 5,683 6.4% 5,840 6.4% 2.8%
    Satyam 4,266 4.8% 4,358 4.8% 2.2%
    HCL Tech 3,724 4.2% 4,013 4.4% 7.8%
    Digital 807 0.9% 873 1.0% 8.2%
    Polaris 705 0.8% 708 0.8% 0.4%
    Hughes 536 0.6% 599 0.7% 11.8%
    Silverline 442 0.5% 404 0.4% -8.6%
    VisualSoft 234 0.3% 244 0.3% 4.3%
    Mastek 193 0.2% 239 0.3% 23.8%
    Total 23,091 25.9% 23,886 26.2% 3.4%
    * Revenues for Wipro Technologies only

    Companies like Infosys, Wipro and Satyam showed revenue growth in line with the sector average. However, those who outperformed were HCL Technologies, Digital and Hughes software. Digital is the only company that has managed to consistently post strong growth in topline. However, this was for the first time in seven quarters that the topline growth was less than a double-digit figure. The company is set to clock almost 80% growth for the fiscal 2002. HCL Tech had strong growth in topline for the quarter ending December. However, for the previous quarter the company managed a marginal 1% growth in topline. Hughes Software too has a similar story; the company had posted very disappointing results for 2QFY02. A strong rebound in product sales caused the company to post a strong growth in topline.

    Operating profit margin Quarter ended September, 2001 Quarter ended December, 2001
    Infosys 39.8% 40.5%
    Wipro 28.5% 27.8%
    Satyam 34.5% 33.3%
    HCL Tech 25.7% 26.5%
    Digital 30.7% 33.8%
    Polaris 23.7% 24.7%
    Hughes 17.4% 31.4%
    Silverline 25.6% 34.7%
    VisualSoft 22.2% 26.2%
    Mastek 34.7% 45.6%
    Total 31.6% 32.1%

    The software companies have managed to contain costs very effectively. Considering the tough environment and therefore, the pricing pressure the sample in fact managed to improve operating margins. This is due to the fact that the largest cost head for the companies is employee costs and these companies have managed to restructure salaries to make them variable in nature. Also a large number of companies including Wipro and Satyam have reduced the number of employee to align capacity with the current demand environment. The companies across the board have also managed to reduce costs in other areas. Only Satyam saw margins falling. The company’s employee costs jumped 12% even as the number of employees declined. However, Satyam managed to cut back on it operating and administrative costs.

    Hughes saw jump in operating margins, as its product sales bounced back to clock a sequential growth of 98%. The contribution of product sales to revenues increased from 13% to 23% in 3QFY02. Silverline too exhibited a significant improvement in margins. The company has been de-emphasizing its staff augmentation (body shopping) business.

    Net profits (Rs m) Quarter ended September, 2001 Quarter ended December, 2001 Change
    Infosys 2,016 2,060 2.2%
    Wipro 2,157 2,323 7.7%
    Satyam 1,341 1,194 -11.0%
    HCL Tech 979 1,231 25.7%
    Digital 223 247 10.8%
    Polaris 154 153 -0.6%
    Hughes 63 145 130.2%
    Silverline 139 118 -15.1%
    VisualSoft 47 55 17.0%
    Mastek 16 94 487.5%
    Total 7,160 7,620 6.4%

    The net profit figure grew in line with the topline and operating margins. HCL Tech’s operating margins grew sharply due to an extraordinary write off in the quarter ending September. Excluding this, the growth would have been 1%. Digital that has been improving its operating margins too showed a steep growth. Silverline posted a sharp drop in net profits due to the fact that the other income for the company declined very significantly. Mastek on the other hand, showed a sharp jump in net profits. Along with the growth in topline and improvement in margins, the company’s depreciation and interest costs declined sharply.

    The numbers more than anything else indicate the resilience of the Indian software industry. In times when the sector is facing such intense pricing pressure, the sample has infact managed to improve margins is commendable. However, this is due to the fact that currently the software industry is facing a glut of professionals. This is giving the companies the room to contain costs. With a significant number of software companies in the west shifting operations to India the competition for talent will intensify. Thus, in the future the companies are likely to find it difficult to cut costs.



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