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Software: Fleet footed performance

May 10, 2002

Undoubtedly, FY02, the year that went by was perhaps one of the most challenging for the Indian software industry. Due to the huge demand supply gaps the companies had been to a great extent insulated from the ‘dynamics of cut throat competition’. But as the going got tough, the tough got going, while the not so tough fell by the way side. The broad patterns seen over the industry were decline in lower growth in volumes, decline in billing rates, clients shifting to more onsite projects, elongation of sales cycles, pressure on margins and decline in attrition. As the promise of a IT revolution turned to more of a evolution and business environment got tougher the clients, took a hard look at what they were paying for the IT services being provided to them. Also, giving into competitive pressures some companies started under cutting. This triggered a billing rate slide. Many like Wipro held on to the their rates and even let projects go for in favour of billing rates.

FY02: Life in the slow lane
Infosys FY01 FY02
Revenue growth 115.4% 37.0%
Operating profit margin 40.2% 39.9%
Net profit growth 114.2% 28.5%
Satyam
Revenue growth 81.3% 42.0%
Operating profit margin 36.5% 33.6%
Net profit growth* 134.4% 55.0%
* Excludes extra-ordinary items for FY01 and FY02

Infosys in FY01 had achieved a 103% topline growth. This came from a 62% growth in volumes and a 41% growth in realisations. However, for FY02, the company’s 37% growth came from a 41% growth in volumes and a 3% decline in billing rates.

The volumes declined primarily due to the fact that in wake of the economic slowdown in FY02, companies were focused on keeping existing systems running. Thus, there were not many takers for development services, which accounts for a significant part of the revenues for a majority of Indian software companies.

Less of bread and butter business
Development FY01 FY02 Change
Infosys 40.0% 32.0% 9.6%
Satyam 63.9% 52.1% 15.9%

However, the fleet footedness of the software companies once again came to light with the fact the companies quickly ramped up business from traditional strong holds like maintenance. The demand for maintenance related services saw a sharp surge as corporates directed their IT budgets for the year towards keeping existing systems up and running.

Maintenance FY01 FY02 Change
Infosys 25.4% 29.0% 56.4%
Satyam 21.1% 29.7% 99.4%

The significant growth in revenues from package implementation was a pleasant surprise. Corporates have spent huge fortunes on various kinds of solutions like ERP (enterprise resource planning), SCM (supply chain management) and CRM (customer relationship management). In many cases these solutions are ‘islands of information’ i.e. one system cannot talk or exchange data with the other. However, for meeting the information need of an organisation in real time all these solutions have to be seamlessly integrated. The process of integrating disparate systems is known as ‘enterprise applications integration’ or EAI. The demand for implementation of SCM, ERP, CRM and integration packages known as middle ware got a boost as companies focused on improving the return on investment from their existing IT solutions.

Packaged software
implementation
FY01 FY02 Change
Infosys 7.2% 9.8% 86.5%
Satyam 6.4% 13.9% 207.3%

Considering the fact that Infosys closed the year with a 37% topline growth and Satyam closed the year with a 42% topline growth even as their most dominant revenue stream (development) grew by 10% and 16% respectively speaks volumes of ability to tap emerging opportunities. Thus, the highlight of FY02 performance was the agility on part of the software majors. The new buzzword is business process outsourcing (BPO). It will not take a wizard to guess that the Indian software majors will do a good job once again.

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