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Software: Growth concerns

Sep 21, 2001

Concerns regarding the software sectors performance began with the slowdown of the US economy. The pessimists immediately jumped at this to point out to the downfall of the sector. The optimists kept hoping that the very small share of the Indian software sector of the US markets would help it avoid being affected by the slowdown. As time progressed the situation proved to be hurting a lot more than anticipated. Companies like VisualSoft that had shown very strong growth rates in the past came out with profit warnings. But with Infosys giving a guidance of 30% topline growth for FY02 (100% plus in FY01), the pessimists had won. Immediately everybody began to work on their growth figures for the sector. The numbers ranged from 25% from a market research firm to 40% from Nasscom.

As the numbers for the first quarter of FY02 came out, the ramifications of the slowdown became more evident. The overall macro environment had deteriorated caused a decline in demand for software professionals and this affected the business of software education companies like NIIT, Aptech and SSI. All the three software education companies posted a huge decline in profits (more than 90% YoY). While at one end these companies saw volumes (number of students) declining at the other end, the realisations (revenue per student) too fell sharply. The drop in realisation is due to intense competition, which has led to undercutting in prices.

The software services companies were clearly separated as the numbers for the first quarter came out. While the top rung companies managed to post a sequential growth in topline (in some cases like Infosys upto 9%), others like Mphasis posted a sequential de-growth. There was tremendous pressure on prices however; some companies managed volumes growth in the range of 10%.

Just when everybody thought the situation had stabilized and the worst was over, or at least we were near the bottom, the world was taken aback to unprecedented acts of terrorism. This is definitely going to have a negative impact on the consumer confidence and this in turn will impact the businesses. These businesses will try to maintain costs and will decrease the spend on IT. This would mean that the Indian software companies might face even worse times.

What will be the growth rate?
(Rs m) FY01 Growth (assumed) FY02E 1QFY02 Remaining for
the year
Average per
quarter revenues
Sqeuential
growth
Revenues 285,000 40.4% 400,000 86,000 314,000 104,667 21.7%
35.0% 384,750 86,000 298,750 99,583 15.8%
30.0% 370,500 86,000 284,500 94,833 10.3%
25.0% 356,250 86,000 270,250 90,083 4.7%

Nasscom has already been very prompt to highlight the impact of the events on the software sector. Infact the organisation has gone ahead to say that the second quarter results for FY02 might be impacted negatively. However, considering the uncertainty in the environment it seems too early to comment.

Significant portion of the revenues of the software companies comes from onsite work. Considering the security threat perception by the US, sending employees to that country might be a bit difficult for the companies. Due to this the revenues from onsite work might suffer.

While these concerns are very valid, it is also true that the organisations that have suffered huge losses will get back to the task of building themselves again. The estimated cost of rebuilding the IT infrastructure is anywhere between US$ 6 bn (Rs 279 bn) to US$ 15 bn (Rs 679 bn), which is as big as the Indian software sector itself.

However, looking at the sequential growth figures for 12 companies that formed 27% of the total revenues for the sector in 1QFY02 it seems unlikely that the sector will be able to clock a growth of more than 25% for FY02. The twelve companies together posted a sequential growth of 3%.

A sample
(Rs m) Quarter ended
March, 2001
Quarter ended
June, 2001
Change % of
export market
Infosys 5,619 6,125 9.0% 7.1%
Wipro 5,171 5,210 0.8% 6.1%
Satyam 3,866 4,119 6.6% 4.8%
HCL Tech 3,632 3,692 1.7% 4.3%
Digital 626 703 12.4% 0.8%
Polaris 776 701 -9.7% 0.8%
Silverline 610 556 -8.9% 0.6%
Mphasis 511 422 -17.4% 0.5%
Hughes 620 634 2.3% 0.7%
VisualSoft 343 285 -17.0% 0.3%
Aztec 245 250 1.7% 0.3%
Mastek 188 193 2.5% 0.2%
  22,207 22,890 3.1% 26.6%
Note: * Numbers for Wipro Technologies

Considering the sector had done Rs 86 bn (US$ 2 bn) in the first quarter, to report Rs 400 bn (US$ 8.6 bn) for the full year, it needs to earn additional Rs 314 bn (US$ 6.7 bn) in the remaining 9 months of the year. This comes to an average of Rs 104 bn (US $ 2.2 bn) per quarter. This is a 21% sequential growth over first quarter, which is quite unlikely. In view of these facts, the sector is likely to grow in the range of 20% to 25%.

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