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Software: Reality bites - Views on News from Equitymaster
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  • Apr 23, 2003

    Software: Reality bites

    The Indian IT industry is in for a re-alignment with reality. Long out of the phase of exorbitantly high rates of growth, the tech story seems to be settling down to a more realistic theme in the minds of the investors. At a time when the biggies like Infosys and Wipro have projected their growth at realistic levels, even the industry association, NASSCOM, has toned down its forecasts relating to growth for the industry. Of late, the feeling of conservatism and caution is taking its roots in the investors’ mind, replacing the ecstasy as depicted earlier by growth figures for the IT sector.

    The established buyers of Indian outsourcing services have begun to understand the Indian offshoring model well and are exploiting it to their advantage. And this exploitation is in forms of ramping up fully owned offshore facilities in the country or driving hard bargains on the pricing front. The very Indian competitive advantage of pricing is now replicated by the multinationals setting up their units here and this is translating into lower billing rates.

    At the time when the global tech sector calls for achieving growth through moving up the value chain, the Indian IT sector still counts for a major chunk of its revenues from works like development, maintenance and customer services. Giving the current competitive nature of the industry and the pressure on IT spending on developed economies, this has served India Inc. well. So in that sense, domestic technology companies have opted for the volume game rather than the premium servicing strategy, for now.

    It is not as if Indian tech companies have given up on moving up the value chain. Rather some of the big names, like Infosys, are trying to do a balancing act. At one end, they seem to be continuing with the current servicing model, on the other, they are actively moving into areas like consulting, which will give them a foothold in the global tech club. The fact that Infosys has chosen to give a very lukewarm guidance is not a sign of a slowdown. Rather it is a sign that the company feels the need to focus on new exciting areas in the IT space for future growth. In that sense, one can look at FY04 as an year for recharging of Infosys’ batteries.

    Another interesting aspect that has come to light in the domestic software industry is the mushrooming of specialist IT companies. While companies like i-Flex, Geometric Software and Hughes Software will grow through concentrating on niche segments like BFSI, manufacturing and telecommunication respectively, the majors, Infosys and Wipro, will continue to look at consulting and other high-end solutions as a route to increase their scope and visibility.

    Indian IT: Across the frontier
      IT services
    spending (US$ bn)
    India's exports
    (US$ bn)
    India's market
    share (%)
    North America 171.1 6.7 3.9
    Western Europe 109.6 2.1 1.9
    Japan 34.9 0.2 0.6
    Latin America & RoW 17.5 0.6 3.3
    Asia Pacific 16.0 0.3 1.9

    Another factor that will aid Indian IT companies’ growth prospects will be the move towards tapping non-US global markets and taking bigger chunks of global IT spending. While the US will continue to generate prospects for Indian IT products and services, opportunities also lie in countries in the western European and Asia Pacific region where the markets still remain largely under penetrated.

    Though volumes will continue to be the way towards higher growth, in the longer-term, moving higher up the value chain, providing customers with better quality differentiated products and services, and the ability to stay put will set apart the winners from the also-rans. In this process of survival, the Indian IT companies are making a transition to the big league by investing in infrastructure and talent. They are setting up marketing and distribution network to take on the global IT majors. Once this transition is complete, companies will be able to start tapping business that had been given to companies of the likes of IBM and EDS.

    In the near term, the valuations for the industry might remain restrained, as there would be continuing pressure on margins and revenue growth. Investors should, thus, realign their strategies with the realism that is shown by the Indian IT industry growth projections. The changing nature of business and global competition is a concerning factor, but for the medium to long-term, IT still remains India’s best bet. But while picking, stick with quality and vision.



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