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Software Challenges Will Persist in 2017
Mon, 30 Jan Pre-Open

Through nearly two decades of stellar growth, India's export-driven software and services sector has both given a boost to exports and, perhaps more importantly, changed global perceptions about India.

But the future of this dream run of Indian software companies now faces a perfect storm as growth slows, profits take a beating, and many are loaded with a workforce running into hundreds of thousands.

So, is it all over for the outsourcing sector? Will an Infosys Ltd or a Wipro Ltd go the Kodak or Blackberry way, and fizzle out in the coming years?

The challenge is two-fold. The first being that US President elect Donald Trump has threatened to change visa rules so that import of cheap technical manpower does not take away jobs from Americans. The US has carefully set up an elaborate regime of importing skills through the issue of H1B visas because US corporations want these cheap imports.

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Localization of workforce is another major step Indian IT companies may take to overcome the likely visa woes during Mr. Trump's presidency.

While the second challenge is from the wider hold of artificial intelligence. According to an article in The Hindu Business Line, Indian companies traditionally offered development and maintenance services through time and material contracts. This was delivered both offshore and onshore but a lot of these jobs are now being automated. So IT firms have to offer clients something more. This means the largest Fortune 500 companies do not need to rely on engineers to do mundane repeatable tasks such as providing customer support.

This has been accompanied by a slowdown in hiring. In the September quarter, the top four Indian IT companies cut their hiring by as much as 43%.

The rise of cloud computing is another cause of worry. Most customers are pressing their technology vendors to offer solutions beyond just rolling out enterprise resource planning applications or testing software. Meanwhile, Indian companies are also constantly looking at their own numbers to see how much of their revenue is generated form digital work.

Plus, Indian companies are lacking in innovation. This has even motivated companies like Infosys and Wipro to create dedicated corporate VC funds to invest in start-ups. Excluding the impact of acquisitions, Wipro's revenue fell by about 30 basis points sequentially in the December quarter. Worse still, the company has guided for 1-2% growth for the March quarter.

In 2017, more such strategic investments, acquisition, hiring strategy and skill trainings are expected from the Indian IT majors. In spite of all the uncertainties, India's market share continues to be at 7% of the global software and IT services spend, and 57% of global IT services is outsourced to India.

Also, the slowdown in growth during financial 2016-17 can in good part be attributed to the global IT spending scenario. Global IT spending contracted for two successive years, by -5.8% in 2015 and -0.3% in 2016.

Certainly, the road ahead won't be easy for the outsourcing sector. The sector, which is staring at a less than 10% growth in the current year, may struggle at a slower clip in fiscal 2018, on account of macroeconomic uncertainties. However one should look into longer term growth prospects. The stronger companies that have a proven track record will be able to adapt with new challenges and sail through these tough times. Our StockSelect service have recommended such stocks which one could consider buying at the current levels.

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