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Software: Long-term focus needed...

Sep 9, 2003

One of the foremost arguments in favour of the current rally in software stocks is that the prospects of the industry are improving and Indian companies are well prepared or are getting to capitalize on the same. The preparations are apparent, Indian software companies have increased their spending on both their technical as well as marketing manpower. Apart from spending Indian companies have also, dramatically increased their employee numbers, in order to cater to anticipated demand. The majors in the industry like Infosys and Wipro have been on a recruitment spree. Infosys added 4,618 employees to its rolls in FY03, while this figure was close to 5,000 for Wipro (Satyam added 1,125 employees) in the same period. As far as future plans are concerned the numbers look even more astounding. Wipro for instance plans to add close to 9,000 employees in the current financial year. Infosys on the other hand is also not expected to slow down. The Infosys management has indicated that it plans to add another 2,000 employees to its telecom services practice in the next 18 months. So, all looks rosy and promising doesn't it? After all who knows the business better than the companies in the sector.

While the debate here at this stage is not whether the rising optimism of Indian software companies is justified or not, investors need to realise that the optimism may not immediately translate in to gains on the bottomline. What we are trying to hint at is that while Indian companies are getting ready to capitalize on the growth opportunity that presents itself (albeit in the long-term) investor expectations and hence investment decisions regarding software stocks need to be long term in nature in order to tide over any short-term hiccups that are bound to take place.

For years one has been hearing about the inherent potential and size of Indian companies that could and will attract larger sized orders. However, the 'Large sized' deals have not exactly materialized till now, except for a few here and there like the recent deal given by Lehman Brothers to Wipro and Tata Consultancy Services (TCS). There are various reasons for the lack of materialisation of large contracts. For one there is a perception among international clients that Indian companies, may not be able to handle large sized order and hence the reluctance form the client side. While this perception is slowly (the emphasis on 'slowly') changing there is still a lot of ground to be covered.

Another hindrance in the whole process is the domestic backlash from US citizens regarding outsourcing work to countries like India. Delays notwithstanding, the fact remains that from here on Indian companies will be able to garner larger contracts, but we believe that it may still be a while before there is consistency regarding the same. Indian companies are headed in the right direction as far as creating capacities are concerned. Having said that, we would like to caution our investors regarding the fact that in the short term there may be pressure on margins as business may not come about at the same speed as employee growth. Hence any decision from here on regarding investing in software companies needs to be long term in nature.

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