Software: Then, now, and then... - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Software: Then, now, and then...

Sep 10, 2003

Stocks from the software sector have witnessed renewed interest off late. While there are still no signs of any recovery in global technology spending, the rise in stock prices seems to defy fundamentals. While nothing seems to have changed for this sector in recent times, when we consider the period before 2000, there appears to be a sea change in the dynamics of the software sector in India. Consider the table below, which is indicative how the matrix for the Indian software sector has changed over these years. Let us discuss each parameter in detail.

Indian software services: Changing rules
Parameter Then (Pre-2000) Now (Post-2000)
Demand High, for basic application development
and maintenance (ADM) services, as Indian
companies concentrated on these services.
Relatively subdued due to slowdown in the global
economy. Higher demand for value added services
like systems integration and package implementation.
Supply High for ADM services. Relatively low for
value-added services as Indian companies
were present at the lower-rung of the software
services value chain.
Oversupply across major segments, more so for
basic ADM services.
Bargaining power
of suppliers
High, relative to the present as during the
bubble period clients were prepared to make
large investments in technology.
Low, due to oversupply and rising bargaining power
of customers (mainly due to slowdown), and inability
to differentiate easily.
Bargaining power
of customers
Low, as demand was overplayed due to high
levels of optimism regarding the benefits
of technology.
High, mainly due to oversupply and pressure of
increasing competition among vendors.
Competition Domestic in nature. High for
ADM services but low in
value-added segments.
Global in nature, and across segments. It has
intensified due to entry of multinational software
services companies.

Demand

Over these years, the dynamics of demand have witnessed a tremendous change. What customers were demanding in the earlier period was more of basic application development and maintenance (ADM), e-commerce services, etc. However, Indian software services companies also had a restricted presence in these areas, and were incompetent to cater to demand for high-value services like IT consulting, package implementation, etc., which were the domains of global majors.

However, off late, Indian companies have been moving up the software value chain, and the market for such services that was non-existent for them (the Indian companies), now seems huge. However, this demand seems subdued at present, owing to the overall downturn in the global economy and the consequent pressure on clients to rationalise IT spending. Going forward, while the market for value-added services seems huge, Indian software companies would move towards providing clients with more high-end offerings by moving fast up the software value chain. Also, the average deal-size is likely to increase, as clients would look at one-stop suppliers for all their IT requirements. This would help Indian companies in their endeavor of growing on the volumes side when their margins would be under pressure (though lesser than now).

Supply

On the supply side, the change for Indian software companies has been from providing (or supplying) low value-added services to high value-added ones. At present, however, there seems to be an oversupply situation across segments, and this is seen in the pressure on billing rates. Also, there has been a rapid shift in the efforts that are used to provide services to clients - from onsite to offshore. These changes on the supply side have been more driven by clients themselves, who, as mentioned above, now consider IT as mission-critical to the performance of their core activities and consider their IT departments not just as cost centers.

Bargaining power of suppliers

This factor has seen a 'worsening' change for the suppliers, or Indian software vendors who have seen their bargaining power reduce considerably, mainly owing to a slowdown in the global technology spending and increasing domestic and MNC competition which has led to an oversupply situation. Also, another reason for this reduced bargaining power has been the inability of vendors to differentiate on the basis of their offerings (products and/or services). Rather, differentiation is now more based on the kind of infrastructure, mainly marketing and distribution, etc. put in place by these vendors. Not many Indian software companies have the ability to spend large sums of money on marketing and distribution infrastructure, and hence they still need to travel miles before they can match competencies of global IT majors. However, going forward, as Indian companies move higher up the value chain, and consolidation reduces the number of vendors offering these services, the pressure on bargaining power of Indian vendors is likely to stabilise.

Bargaining power of customers

'Consumerism' cannot be exemplified anywhere better than in the software sector! In earlier times, the bargaining power of customers was lower as high demand for software services seemed more as a result of the urgent need to copy competitorsí state-of-the-art IT systems than anything else. However, things have changed considerably over these years. Oversupply situation, and competitive pressures that Indian software services companies are facing, has put the bargaining power in the hands of customers. Going forward, as more and more clients drive the change towards outsourcing and with consolidation among vendors, this bargaining power is likely to stabilise.

Competition

Competition in the software sector has taken a turn for the better. While Indian companies faced more competition on the domestic front, this situation has changed now. The fact that the very need to move up the value chain has put the Indian software companies into the domain of global majors, where the competition is more severe in nature. However, there is a regular complaint that MNCs setting up bases in the country are giving sleepless nights to Indian companies, and that India is fast losing its cost advantage, we think that this is the right time for the Indian software sector to move out of the 'low-cost' conundrum. Over that, the fact that more and more MNCs are replicating the Indian offshoring model should 'enthuse' the Indian companies, as this is likely to provide more authenticity to the model and bring in higher quantum of business for Indian software vendors.

While the factors mentioned above have changed for the Indian software sector, they just signify the macro-picture. What is happening in each software company would present a more detailed and 'enlightening' study. While this is not possible to do for all companies in the Indian software sector, we would continue to update you on the changing dynamics of the same, for we all are part of this change that is engulfing India and its constituents.


Equitymaster requests your view! Post a comment on "Software: Then, now, and then...". Click here!

  

More Views on News

PERSISTENT SYSTEMS at All Time High; BSE IT Index Up 0.4% (Market Updates)

Sep 28, 2020 | Updated on Sep 28, 2020

PERSISTENT SYSTEMS share price has hit an all time high at Rs 1,324 (up 4.3%). The BSE IT Index is up by 0.4%. Among the top gainers in the BSE IT Index today are PERSISTENT SYSTEMS (up 4.3%) and ORACLE FINANCIAL (up 1.7%). The top losers include INFOSYS and TCS (down 0.1%).

TAKE SOLUTIONS Share Price Up by 10%; BSE IT Index Up 0.7% (Market Updates)

Sep 28, 2020 | Updated on Sep 28, 2020

TAKE SOLUTIONS share price is trading up by 10% and its current market price is Rs 50. The BSE IT is up by 0.7%. The top gainers in the BSE IT Index is TAKE SOLUTIONS (up 10.0%).

MPHASIS Share Price Up by 5%; BSE IT Index Down 0.2% (Market Updates)

Sep 28, 2020 | Updated on Sep 28, 2020

MPHASIS share price is trading up by 5% and its current market price is Rs 1,339. The BSE IT is down by 0.2%. The top gainers in the BSE IT Index are MPHASIS (up 5.3%) and TAKE SOLUTIONS (up 6.7%). The top losers are WIPRO (down 0.3%) and TCS (down 0.8%).

PERSISTENT SYSTEMS at All Time High; BSE IT Index Down 0.2% (Market Updates)

Sep 28, 2020 | Updated on Sep 28, 2020

PERSISTENT SYSTEMS share price has hit an all time high at Rs 1,250 (up 1.5%). The BSE IT Index is down by 0.2%. Among the top gainers in the BSE IT Index today are PERSISTENT SYSTEMS (up 1.5%) and ORACLE FINANCIAL (up 0.8%). The top losers include INFOSYS (down 0.3%) and TCS (down 1.2%).

More Views on News

Most Popular

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

Can the Nifty Fall to 10,200? (Fast Profits Daily)

Sep 24, 2020

The Nifty has reached an important support level today. If it breaks then we could see further downside.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE IT


Sep 28, 2020 (Close)

S&P BSE IT 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS