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Software: Down but not out - Views on News from Equitymaster
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  • Jun 25, 2001

    Software: Down but not out

    Software industry in the country is facing difficult times due to the industry having a geographical mix heavily inclined in favour of the US. However, considering the break up of revenues vertical wise, again the industry is inclined towards BFSI (banking, financial services and insurance) vertical. Infosys for example has 33% of its revenues coming from this vertical.

    The banking and financial services industries adapted to information technology (IT) due to the fact that the business model of these industries was such that IT could be used in a lot more aspects as compared to others. For the banking industry customers could now do most of their banking on the Internet. Except for the physical delivery of cash most of the needs were taken care of. With implementation of payment gateways even payments could be made online. And of course the financial services industry too had a lot to offer. Shares could be bought and sold, clients could track the markets, read research and be offered a host of innovative services.

    However, with the technology meltdown, many investors have burnt their fingers on the Nasdaq. This had consequently led to decline in brokerage for these firms and the investors are now shying away from the stock markets. As a result the companies have capped their IT spend. According to TowerGroup, the financial services companies IT spend had a CAGR (compounded annual growth rate) of 17.3% in the period from 1998 to 2000. But in the future, this CAGR is expected to be around 7.8% till 2004. The markets from a current size of US$ 25.3 bn are expected to grow to US$ 34.2 bn in 2004.

    This is certainly not a piece of news that will make the software industry happy. This effectively means that the software industry will unlikely show growth rates like in the past. However, there is hope.

    These firms plan to keep up their Internet spending. The figure had dropped from US$ 3.1 bn in 2000 from US$ 3.9 bn in 1998. This was common across all verticals, as the promise of the Internet as ‘the selling avenue’ never really came true. Infact most of the software companies had significant drop in Internet revenues for 4QFY01. Satyam that showed a significant drop in sales from e-commerce revenues managed to maintain its growth rates by taking on more business in the area of maintenance.

    With growing understanding of customer usage pattern of the Internet for their services, the financial services firms will use the Internet to deliver more and more customised solutions. This is another area where the technology spending is likely to be ramped up. However, this may not happen unless the US economy recovers and the business is good enough to justify the technology spend. The share of spend on customer relationship related solutions is expected to grow from 3.9% in 1998 to 5.6% in 2004. The market for these solutions is expected to grow from US$ 0.98 bn to U$ 1.93 bn in 2004, a CAGR of 18%.

    Also, Indian software companies might see the demand for software increasing due to the fact that final payment and settlement of all trades will have to be implemented one day after the trade (T+1) as compared to 3 days after the trade (T+3) presently. This is expected to be implemented by 2004. The IT solutions required to implement these new requirements will cost to the tune of US$ 2.5 bn. 40% of IT budgets are expected to be dedicated to ‘T+1’ requirement in 2002. As this will be mandatory for all organisations, the IT spend too will not be optional. This might be a breather that the software industry is looking for.



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