Still Hung Up on Software

There seems to be no end to the bad news in the software industry. The

industry registered a growth of mere 21% (excluding the IT enabled services

segment) compared to over 60% in FY 2000-01. But the turbulent year had a silver

lining. Take a look at the stock market. The sun is still shining for people who

put their money where their conviction lies. The Dataquest Stock Index (DSI)

outperformed the BSE Sensex by 19%. In fiscal 2001-02, the DSI grew by 16% as

the Sensex fell by 3%. For an industry that faced a bad year, this growth is

commendable. Another sub indicator - market cap. While the market saw a decline

for companies like NIIT (blame it on training) and Hughes Software (telecom’s

the culprit here), it was on the rise for a majority of the companies.

The past year has been the worst in a decade. Companies that had become

accustomed to year on year growth of over 50% suddenly realized that the party

was over and faced the prospects of falling revenues or flat growth and a

squeeze in their margins. And the worst affected were companies like NIIT and

SSI with significant revenues from domestic training. NIIT is down by over 67%

in market cap, while SSI saw over 70% erosion of its equity wealth. But

maintaining profit margins was high on the agenda for IT companies and measures

for cutting costs and increasing productivity were initiated. For instance, at

Wipro Technologies, Six Sigma initiatives contributed to savings of Rs 920

million. The gains in productivity along with cost management initiatives helped

the company retain operating margins at 34%. Companies starting de-risking and

moving into new areas, a practice unheard of during good times. Companies like

Infosys, Mphasis BFL, and HSS initiated moves into the ITeS segment and

initiatives for business process management and IT outsourcing were launched.

HCL Technologies brought out Apollo Contact Center to embark on its journey

into ITeS with the aim of becoming a global BPO company. Wipro too followed a

similar strategy and invested Rs 48 crore for a mere 17% in Spectramind

eServices, a leading India based ITeS player. However de-risking the business

from US dependence will take some time. Barring Wipro, whose European

contribution increased from 29% for the year ended March 31, 2001, to 36% for

the year ended March 31, 2002, other companies still have a long way to go

before they de-risk themselves from the US market. Infosys had just about 20% of

its revenues originating from Europe while the US accounted for about 70% of its

business.

FY 2001-02 will remain a watershed year for Indian software companies. Indian

software companies have learned that even Indian software is prone to ups and

downs. But it will emerge stronger and reaffirm the belief of investors that

software stocks are still the best investments!

Yograj Varma in New Delhi