Sep 10, 2003|
Software: Then, now, and then...
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
||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.
||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.
|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.
|Low, as demand was overplayed due to high
levels of optimism regarding the benefits
|High, mainly due to oversupply and pressure of
increasing competition among vendors.
||Domestic in nature. High for
ADM services but low in
|Global in nature, and across segments. It has
intensified due to entry of multinational software
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).
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 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.
More Views on News
Aug 2, 2017
A better than expected turnaround in performance results in a change in view.
Jul 27, 2017
Digital services drive growth for Wipro in 1QFY18.
Jul 14, 2017
Infosys starts FY18 on an encouraging note with a stable performance.
Aug 5, 2017
How to get exclusive insider recommendations from Ankit Shah.
Jul 14, 2017
TCS starts FY18 decently despite an adverse currency impact.
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407