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Nasscom: The numbers tango

Jul 1, 2002

The National Association of Software and Services Companies, Nasscom, seems to be imitating corporate America to the tee. The representative body of Indian software companies has restated its numbers. But before you take Nasscom to the court, the numbers changed are projections for size of the software industry in 2008. The past
Nasscom along with consultancy firm McKinsey had in 1999 estimated software exports to reach a size of US$ 50 bn by 2008 and the total size of the Indian software industry was estimated to be US$ 87 bn.

($ bn) FY98 FY08 CAGR
IT services 2.1 38.5 33.8%
Software products 0.6 19.5 41.6%
IT enabled services 0.4 19.0 47.1%
E-business 0.2 10.0 47.9%
Total 3.3 87.0 38.7%

But then the unexpected happened. With the US economy slowing down, the swift growth of the Indian software companies also hit a speed breaker. Many were of the view that the Indian companies would not be affected; thanks to the small share of the global IT services markets. The market share of Indian companies in FY02 was 2%. However, skeptics were proved right. Consequently, growth of software exports dropped from 68% in FY01 to 28% in FY02.

The software products and e-business were the worst affected areas of the slowdown. Since large chunk of the software products from India were add-ons and not mission critical, they were perhaps among the first to be the knocked off the buyers’ list. With companies adopting a cautious approach before migrating to the web, the e-business services also took a hit. The corporate spending in FY02 was directed at keeping existing systems running and squeezing more juice out of existing IT systems. New IT initiatives were restrained. As a result, areas that witnessed growth were maintenance and package implementation.

Consequently, Nasscom and McKinsey decided to redo their numbers.

The fresh numbers
Nasscom’s new numbers also estimate the size of the IT market to be in the range of US$ 77 bn – U$ 80 bn as compared to US$ 77 bn in the earlier expectations. Hold on! Weren’t the figures given earlier totaled US$ 87 bn? Yes, but that is including e-business revenues. Post 2002 no one seems to be very interested in talking about it, neither Satyam nor Nasscom. Both have conveniently stopped talking about the share of revenues and growth from e-business. Makes sense, since the numbers don’t look exciting anymore. After all, what is the point giving numbers that are not impressive?

Revised size of the software industry in 2008
($ bn) 1999 estimates 2002 estimates
IT services 30 28-30
Software products and technology services 10 8-11
IT enabled services 17 21-24
Domestic markets 20 13-15
Total 77 70-80

Also, the revenues from software products earlier estimated to be US$ 19 bn are now estimated to be about US$ 10 bn along with technology services. However, the US$ 10 bn estimate does not include domestic figures. Since the break up of the numbers is not comparable, it becomes very difficult to estimate whether Nasscom expects a decline in sales or not. We would assume that Nasscom has cut growth expectations for revenues from products.

Very interestingly, the number that has been sharply reduced is the size of the domestic market. This can easily be blamed on the ailing economy.

The only number to be revised upwards is the revenue from ITES (IT enabled services). Considering the performance in FY02, the numbers has been revised steeply northwards. A significant number of players have entered the segment allured by the potential market and lower barrier to entry. However, it is quite possible that the industry might witness a consolidation going forward as seen with the software industry. Also, there is a possibility of business being lost due to the quality of service not being as per client expectations. This was seen in the medical transcription industry. Thus, sometime down the line Nasscom might be faced with harsh realities once again.

Nasscom changed the growth estimated for FY02 thrice. It is inexplicable why Nasscom is so deeply involved with the numbers game. The numbers put out by the organisation have been and are likely be used by numerous corporate entities to paint gorgeous pictures. This has happened in the past and no reason why it will not continue. Retail investors should take the numbers with a pinch of salt. If at all they should look for a growth estimate, guidance from top companies in the sector with credible management should give a better bearing.

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