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Software 4QFY01: Boys to Men

May 7, 2001

Before the fourth quarter results were declared the million dollar question was would the Indian software majors take a hit due to the downturn in the US economy? Lot of theories were flying around. One said that considering the miniscule market share Indian companies had, it was quite unlikely that they would be affected by the slowdown. American companies would try to improve operational efficiencies by becoming e-enabled. This would benefit Indian software companies. Another set said that the first thing a company would do during tough times would be to cut costs and this would start with areas on which the company had the least amount of control like software development being done in India.

And 4QFY01 results have laid to rest all speculations. Indian software companies took a hit. And the area that was worst hit was e-commerce. The myth that companies would increasingly spend of e-commerce to cut down on logistic costs was broken. Due to uncertainty in the economic environment the clients were not experimenting with new technologies. The only market that gave a steady stream of income was that of legacy systems.

Net sales growth
  QoQ YoY
Infosy 4.6% 102.5%
Wipro* 7.7% -
Satyam 18.0% 87.9%
Hughes 10.1% 86.0%
HCL Tech 1.7% 85.0%
VisualSoft -15.2% 54.5%
*numbers for Global IT division only

Infy managed to post a meek QoQ growth (compared to 3QFY01) as it saw revenues from the areas of e-commerce and telecom taking a dip. Satyam on the other had managed to offset the loss of business in the area of e-commerce by increased business in legacy systems. Wipro was one of the few majors that actually managed to show an increase in revenues from e-commerce.

VisualSoft that had earlier given a profit warning did better than expected. But the company has taken a hit as far as product sales are concerned. Sequentially the product sales have dropped by 2%. Obviously the implication is that these products are not mission critical. They might be used as add ons to improve operations and thus, in a bleak environment when a client had to cut costs they were the most suitable candidates.

Similar was the fate of companies that have been more inclined towards enterprise application software. The reason these companies could have taken a greater hit is that the software these companies make helps in improving operations that have been for years being done without the software. Therefore, the most important lesson here is that software is a means to an end and when bad times come like a tough economic environment the software can wait. Even Wipro’s enterprise solutions division showed a negative growth sequentially.

Net profit growth
  QoQ YoY
Infosy 9.1% 111.2%
Wipro 15.2% 151.0%
Satyam 27.2% 164.3%
Hughes 20.1% 84.0%
HCL Tech (3QFY01) -2.0% 117.5%
VisualSoft -40.6% 38.8%

What was heartening to note was the strong performance by all the technology-focused companies, HCL Technologies, Wipro (Global IT division) and Hughes Software. All these companies seemed unaffected by the slowdown. HCL Tech and Wipro grew strongly based on the growth from the embedded systems area (Infosys too has shown a 43% sequential growth in this area). These companies despite working on recent technologies due to the criticality of the projects they were working on, managed to buck the slowdown. All these companies essentially service the technology (telecommunication, networking and embedded systems) domain. The only way their clients can stay ahead in the race is by continuously improving existing technologies. This could be a reason that the tech-focused companies were cushioned from the impact of the slowdown.

Operating Margins
  3QFY01 4QFY01
Infosys 38.9% 41.1%
Wipro* 35.0% 35.0%
Satyam 37.8% 37.3%
Hughes 35.7% 41.9%
HCL Tech 52.1% 53.3%
VisualSoft 51.0% 35.7%
*numbers for Global IT division only

Another very interesting number to look at would be movement of operating margins compared to the pervious quarter. This would definitely separate the boys fro the men. Amongst the major software companies only Visualsoft and Satyam saw a dip in operating margins rest either managed to hold or improved the figure. VisualSoft saw a dip in operating margins as its high margins business of software products took a severe hit. Satyam might have seen the marginal drop in operating margins due to increased contribution of legacy systems to its portfolio. This area is not so profitable as the work is mainly of maintenance in nature.

Infy managed to improve operating margins despite a fall in utilization rates. This is an indication of the company’s brand strength. Hughes managed an amazing 600 plus basis point increase in operating margins. This could be due to the increasing contribution of products to its portfolio.

When the supply demand equation was skewed in favour of the software companies, all the companies posted amazing numbers. But with first speed breaker the men are firmly on boat but the boys are showing signs of falling.


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