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Software: Nasscom estimates 30% growth

Nov 8, 2001

The software sector, according to Nasscom, earned Rs 89 bn (US$ 1.8 bn) from exports in 2QFY02. This translates to a YoY growth of 20% and a sequential (QoQ) growth of 3.5%. For 1HFY02, the sector grossed Rs 175 bn (US$ 3.7 bn) in exports. This translates to the fact that the sector’s exports have grown by 34% compared to the 1HFY01. The strong growth rate for first half of FY02 is on the back of a 54% YoY growth that the sector had clocked for the first quarter of FY02. In FY01, the software exports had seen very strong growth rates (65%), which came from first three quarters for the year. However, from 4QFY01 the impact of the slowdown was visible in the revenue growth of the software companies.

Nasscom now expects exports to clock Rs 370 bn (US$ 7.7 bn) for FY02 (30% growth). This means that the sector will have to earn additional Rs 195 bn (US$ 4 bn) in the second half of the fiscal FY02. This works out to a growth rate of 26% YoY and a growth of 11% over 1HFY02. To achieve 30% full year growth the remaining two quarters would have to clock Rs 97 bn (US$ 2 bn) on an average. This works out to a sequential growth of 10% for the next two quarters.

(Rs m) FY01 Growth (assumed) FY02E 1HFY02 Remaining for 2HFY02 Growth
Revnues 285,000 40.4% 400,000 175,000 225,000 28.6%
    35.0% 384,750 175,000 209,750 19.9%
    30.0% 370,500 175,000 195,500 11.7%
    25.0% 356,250 175,000 181,250 3.6%
    20.0% 342,000 175,000 167,000 -4.6%

These numbers look quite steep considering the fact that the impact of tragic events in the US could be felt in the revenues of software companies in 2HFY02. Wipro that expects a 5% sequential growth in revenues of Wipro Technologies has given the best growth for revenue guidance for 3QFY02, amongst software majors. Infosys and Satyam have indicated a flat revenue growth. Also, for the first two quarter of FY02, the sequential growth for the software companies was in the range of 3% to 4%.

Considering this, we estimate that the growth for the sector should be in the range of 20% to 25%. This means that for the next two quarters the exports will have to grow sequentially by 2%. The reason for expecting a lower growth rate for 3Q and 4Q stem from the fact that Infosys has for the first time given revenue guidance this fiscal wherein it expects a sequential dip in topline. Infy in the previous quarter had clocked a 6% growth. It seems unlikely this quarter. Wipro that grew by 9% in 2QFY02 expects a lower sequential growth. Wipro, Satyam and Infosys accounted for 20% of the market share in 2QFY02.Click here to read on details of 2QFY02 results for the software sector.

Market share 1QFY02 2QFY02
Infosys 7.1% 7.3%
Wipro* 6.1% 6.4%
Satyam 4.8% 4.8%
HCL Tech 4.3% 4.2%
Digital 0.8% 0.9%
Polaris 0.8% 0.8%
Hughes 0.6% 0.6%
Silverline 0.5% 0.5%
Mphasis BFL 0.7% 0.5%
VisualSoft 0.3% 0.3%
Aztec 0.3% 0.2%
Mastek 0.2% 0.2%
Total 26.6% 26.6%
* Numbers for Wipro Technologies only

For the past three quarters, the toughest times for the software companies, revenues from upgrading legacy systems and maintenance has been fuelling growth of software companies. However, Nasscom expects the revenues from this area to come down in the near future. The new growth areas for software companies are expected to be packaged software integration, network infrastructure integration and outsourced R&D is set to show significant growth. McKinsey expects four distinct business models to emerge in the future. Some companies would concentrate on contract manufacturing, systems integration, business process organisation (BPO) and technology innovation.

Software majors are looking at a combination of all these business models. Wipro Technologies earns 52% of its revenues from R&D space. The company recently earned a US$ 75 m contract in the systems integration space. For 1QFY02, HCL Tech earned 41% of its revenues from R&D services. HCL Technologies also has floated a subsidiary called E-serve to focus on the (BPO) space. Infosys too has plans to have a strong presence in the BPO space.

However, considering the large markets, 25% growth for the sector in the current year should not be taken as a indication of things to come. The future holds a lot in store for these companies. Investors could seriously look at some top rung software companies with world-class management teams as a long-term investment option.

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