"The Indian software industry is not building any intellectual property." - Views on News from Equitymaster

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  • Mar 17, 2001 - "The Indian software industry is not building any intellectual property."

"The Indian software industry is not building any intellectual property."

Mar 17, 2001

Dr. Nirmal Jain has been the Managing Director of Tata Infotech since September 1996. After gradating in Electrical Engineering from I.I.T (Mumbai) he went on to pursue his Masters. He earned his Ph. D in Computer Science from the University of Hawaii. Dr. Jain has also completed an Advanced Management Program (AMP) from Harvard Business School. In an interview with equitymaster.com, Dr. Jain spoke about the future of the software industry in general and Tata Infotech in particular. Dr. Jain also commented on the challenges facing the software industry.

EQM: How do you see the software sector moving in the next few years globally and domestically?

Mr. Jain: The software sector will continue to grow globally. Software has become very critical and important as it ultimately helps the end user (customers) to automate. With globalization competition has increased. Automation and use of IT has become very critical to every industry, every business and every user. If you use more IT you have to use more software, both packages and services.

An interesting trend is that there will be a large demand for software packages. As today the customers are looking for faster implementation. They do not have time to wait for 12 months to 18 months for software to be developed. Typically, customers want solutions as soon as possible. It can only happen if this is based on certain packages.

But on the whole the software sector would continue to grow internationally.

India, of course, has seen tremendous growth in the last few years and I think the growth will continue. But the growth rates are something, which are debatable. The moot point is whether the same growth rates will continue or not in the future. As the business increases for India, to maintain the same growth rates also means we have to do larger amount of new business every year. Last year our turnover was US$ 3 bn. To maintain a growth rate of 50-60% you need to do additional business worth US$ 1-1.5 bn. That is not easy. But nonetheless, I think the companies have the momentum and there are new companies coming in. With good opportunities in the western world I think the potential is there.

Now there are reports of the US slowdown, which could impact the US markets. There are views that it may or may not impact. But ultimately in a slow down the customer looks at cost cutting, which means he wants to move to offshore.

EQM: When you say this, one thing that comes to the mind is would the customer like to come out to somebody in India or outsource in the US itself?

Mr. Jain: You are combining two things. I am not saying new customers would certainly come to India but those who have experience with the Indian companies and established relationships will look at pushing more work offshore. For the new customers the situation will be the same irrespective of whether there is a downturn or not. They would first like to establish credibility and then give business for offshore activities.

EQM: What do you feel as to whether the impact of the slowdown would be qualitative or marginal?

Mr. Jain: There will be some impact but I donít think it will be very significant. If you do not have established customer base you are likely to have problems.

EQM: Tata Infotech is basically divided into four groups what are the contributions of each group to the topline and what are the operating margins?

Mr. Jain: If you look at the contribution of each business, the international software business brings in about 50% of the revenues, the domestic system integration business brings in 30% to 35% and the remaining comes from hardware manufacturing and education business.

Hardware gives a good contribution because we have chosen a niche in the hardware market (basically electromechanical type of equipments). The major product that we are manufacturing is a product, which is for Unisys, a cheque-processing device. It helps to sort check and therefore requires a lot of mechanical inputs.

EQM: How do you see the business mix in the future?

Mr. Jain: We see the largest growth from the International business. So the percentage of business from international business in the revenue pie will grow. We expect domestic business to grow at a slower pace. Our focus is really to look at more quality business. The education and hardware manufacturing will continue the same way in the next financial year.

EQM: What are the operating margins for the different divisions and how do you see them moving in the future?

Mr. Jain: The operating margins would still be the best for the overseas business and they will continue to be so. For the domestic business the margins are low and itís always a challenge to get good margins from domestic business.

EQM: What kind of thrust do you have in your education business?

Mr. Jain: In the education business we have almost changed in the last two three years. In the last two years we have focused much more on content. We are focused more on partners that we work with. Earlier it was kind of an arms length business with an affiliate. Now we are working closely. We participate fully by providing the faculty so that we are assured of their and our success.

The second type of partners are where we do not get involved but we only provide the content and then they execute it. So we are not involved on a day to day basis. We provide the courses, upgrades, process and then they execute.

Education business in FY00 had slowed compared to the previous year. This is because of the changes we brought and also because of the changes in the way we were accounting for revenues. But we expect the growth rate in the business of least 20%.

EQM: Are there any plans to go online with the education business like others?

Mr. Jain: There is really no online in education. May be they provide courses to people on the Internet. But we are not considering that.

EQM: What are Tata Infotech capex plans?

Mr. Jain: Our capex plans are not very heavy because we have already invested a lot in facilities. Investment in equipment is a normal thing for hardware and software, which will continue. So we donít expect any major change in the capex.

EQM: What are the areas that will be the growth drivers? Which technologies?

Mr. Jain: Very clearly the international business will be the growth driver. Technology is a part of it. You cannot separate technology out of it. You wonít be in business if you are not able to do technology work. The growth will also come from legacy systems. People are not going to write off their investments in the legacy systems.

We have very large activity in the e-commerce area. We have set up a business center in Bangalore focusing only on e-commerce. And of course e-commerce is not something, which you can separate out since it is a part of everybodyís business. Whether it is finance, manufacturing or insurance. Also we have been looking at a lot of investments in technology. We have an applied technology group we that is expected to give us more business.

EQM: What kind of domain areas is Tata Infotech looking at?

Mr. Jain: We have very clear domain areas. We are in finance, insurance, manufacturing, telecom and commercials

EQM: Do you have any major clients in the insurance area?

Mr. Jain: We have number customers in the area. One of the large clients is a US company called MetLife (Metropolitan Life Insurance Company). It is one of the largest insurance companies in the USA.

EQM: IT security is still a nascent market in India. As one of the first entrants what is your out look?

Mr. Jain: Security market is a tremendous market. We hear about the problems in security every other day. As companies depend more and more on the net (Internet) it will become a major issue. People will look for services to see how their environment can become more secure. They could look at products they can use. They could look at strategies. Security will be a service for sure. Customers will come to you and say can you please help me make my systems more secure. This would involve products, services, understanding and consultancy. That would be a completely involved activity. But we donít expect it grow very fast. In that space you need to have a very strong credibility. The big five-six consulting firms have a much better position today because they have been known to be doing security type of consulting.

EQM: What is the attrition rate for the company?

Mr. Jain: Attrition was very bad last year. We had to face a lot of attrition last year. However, we expect things to stabilise this year. I can of course understand last year the entire environment had changed market had opened up and also we had gone through a problem earlier year so people were without assignments for sometime. Therefore, they were feeling uncomfortable.

EQM: As an industry leader what do you think are the key strengths and weaknesses of the software industry?

Mr. Jain: The strengths of the Indian software sector are the skills of the people and we are good at it. The major weakness we have is that we cannot retain these people. We are also not building any intellectual property or major knowledge base, which we can utilise. That is where I believe that the software industry has to focus on as to what is their intellectual property. For example it may be a certain process, product, system or capability. I think those are very important for the Indian software industry. Otherwise what is the differentiation? Tomorrow China can train their people up and they will be as good as us. And of course you have others like Vietnam, Philippines. But the threat will take sometime. Real threat will come probably four-five years down the line.

EQM: On the personal front we would like to know about the people who have influenced you the most?

Mr. Jain: Of people who have guided me, the top person in my mind is Mr. Kohli (F.C. Kohli, Chairman TCS). He has really helped me in shaping my knowledge and thought process in this industry. The second person of course is Mr. J. R. D. Tata whom I have always looked upto. The thoughts, ideals he had, have been very close to my heart.

EQM: What are the books that you like the most?

Mr. Jain: There are number of books that I read. The books I would like the people at CEO level to look at would be strategy related books, thoughts and people related. These are the areas that are very critical for us. Besides these, I do spend time on technical journals.

EQM: What takes up time outside work?

Mr. Jain: Family. I do have a number of hobbies but I donít get time. Mainly being with the family. I do like to travel quite a bit with the family.

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