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Software sector: Uncertainty continues - Views on News from Equitymaster
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  • Jun 19, 2001

    Software sector: Uncertainty continues

    Nasscom recently lowered the growth estimate for the software industry yet again. This time the growth rate was pegged to be in the region of 35%, down from an earlier estimate of 40% to 45%. The reason for this cut in growth rates is more than obvious - the ailing US economy. Nasscom seems to be taking a cautious stand now, compared to the confidence it put behind 50% plus growth rates that it had projected in November. The uncertainty in the US economy is the reason why Nasscom too, cannot be sure of the growth rates it has been projecting.

    Though the Fed has cut interest rates five time already, the economic indicators in the US are giving very conflicting signals. To add to this the spate of lay off continues. This in turn will hurt retail spending. Retail spending in the US accounts for a significant proportion of the GDP (about 66% of the GDP). Therefore, for the economy to pick up retail confidence is essential. However, as lay offs continue it is unlikely that spending is going to pick up in the near future. The problem with the US economy has been manifold. Firstly, a booming economy caused excess capacity. Also, to arrest the fast paced growth in the US economy, the Fed had hiked interest rates six times (prior to the series of rate cuts). The winter in 2000 was quite severe and to add to this the oil prices were at an all time high. And then of course the IT bubble burst. So, the economy was left with a huge excess capacity and no takers for the products and services. Therefore, supply exceeded demand. For the economy to grow again the demand must exceed supply, which means we will have to wait for the excess capacity to be shed. The lay offs are a part of the exercise to shed excess capacity. And no one is quite clear as to when the demand will again overtake supply.

    As for the software companies at home, the futures prospects lie tied to this uncertainty thanks to their heavy reliance on the US for business. Even the community as a whole has been poles apart about their prospect for FY02. While Infosys has issued a very cautious guidance of 30%, Wipro and Hughes Software seem to be quite upbeat about their prospects. Infact, Wipro has claimed that it will grow above the industry rate. Infosys had earlier projected the growth for the whole sector to be in the range of 30% to 35%, a figure that the Nasscom has projected recently. Satyam on the other hand has been quite ambiguous, without giving any numbers. The company has said that it is cautiously optimistic about the future.

    Company guidance (Sales FY02) March' 01 June' 01
    NASSCOM (Software exports) 40%-45% 35%-40%
    Infosys 28%-30% No change
    Hughes Software 61% No change
    Satyam Cautiously optimistic No change
    Wipro Beat industry growth
    No change
    NIIT Decline in OPM of
    30%-40% for FY01
    No change
    Mphasis 56% 35%

    The problem has plagued mostly the second rung software companies that do not have an established brand name. The companies that have been worst affected are VisualSoft and NIIT that have issued profit warnings and are still reeling. Of course each of the companies had their own problems like VisualSoft was hit as its product sales did not grow in 4QFY01. NIIT was hit because it had most of its offering in the new technology area for which there were not takers. Satyam on the other hand managed to maintain its sequential growth rates by taking a lot of business in the maintenance area, which offset the business it had lost from areas like e-commerce.

    The Indian software industry has never seen such tough times before. Therefore, it may not have been able to change its portfolio according to the need of the hour. A lot of companies had spent huge chunks of money on building capabilities in areas like wireless that has not quite taken off and certainly does not have many takers in this tough economic environment. As the uncertainly looms large, the Indian companies can definitely take valuable lessons in dealing with tough market environment. For the future is unlikely to be as rosy as the past.



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