SW INDUSTRY: Working around the Slowdown

Are the sunny days of the Indian software industry over? With reports of a

slowdown in the US economy and a subsequent cut in IT spending there, widespread

concerns have been raised for the Indian software industry, which earns majority

of its revenues from the US clients.

With Nasdaq–the Mecca of tech stocks–plunging to its one-year low in

November 2000, IT stocks suddenly lost their golden sheen and turned

non-attractive to investors. Back home, even a bellwether like Infosys had to

take a beating with its share price falling from Rs 13,813 in March 2000 to Rs

5,416 in December 2000. According to critics, another indicator of the slowdown

and its impact on the IT industry has been the recent revision of the software

exports estimates by Nasscom, from $6.3 billion to $6.2 billion. Nasscom,

however, claims that the revision is due to the depreciation of the rupee and

has nothing to do with the slowdown.

Will IT, won’t IT?

The

ripples of the US slowdown will be felt globally, simply because the IT supply

chain extends half way down the globe from there. It should cause a big concern

not only for the Indian software industry but also for the Indian economy.

So far, IT as an industry has seen growths unheard of by any other industry

in India. India has been banking on IT to muscle in the global economy with its

desired IT superpower status by 2008. The results have been impressive, with the

software industry becoming a high foreign exchange earner. According to Nasscom,

in H1, 2000-01, the industry registered a growth rate of 58% with exports

generating a revenue of Rs 13,100 crore, which was about 13% of India’s total

exports of $22 billion during these six months. The US continued to be the

biggest market for software exports accounting for 56% of the exports.

According to analysts, the US slowdown concerns across the globe could hit

India in a hard way since the US is the most favored export destination for

India and was responsible for generating 67% of its revenues last year.

A streak of optimism

Not all find the picture so gloomy. Aditya Pant, head, research operations,

IDC India, doesn’t see much cause for worry as far as the Indian software

sector is concerned, "One does not have to ring the doom bells right now,

the growth will definitely continue, although the rate may slow down

slightly."

For the last few years, the Indian software Industry has grown at an

impressive rate of over 50%. Now one may see the growth falling to about 45—50%,

which by no means is slow, considering the average industrial growth rate of

India. It is, however, possible that smaller players will be affected by the

slowdown. Those who were heavily dependent on dot-coms or were purely into body

shopping (especially those who were not dealing with clients directly), are

likely to be the worst hit. As Phiroz Vandrevala, executive VP, TCS and vice

chairman, Nasscom points out, "In the Indian scenario it is possible that

some of the smaller companies may be hit but overall the industry will not be

effected."

The recently announced Q3 results of some software majors do not show any

immediate impact on the industry and the industry captains do not foresee much

changes in the growth figures in the near future. Infosys, Satyam and Wipro

recently released their Q3 figures and all have reported strong growths and

profits, with Infosys recording over 100% growth in revenue and profits and

Satyam and Wipro showing over 100% growth in profits. This is despite more than

60% of their revenues coming from the US. What is more significant, none of the

top Indian IT companies have issued revenue warnings for the future. In fact,

towards the end of January even the stock market gods have started to smile once

again on the IT segment, with Wipro adding a market capitalization of Rs 81

billion and Infosys of Rs 64 billion.

The opportunity

The US economic slowdown could even be a blessing in disguise. The slowdown

may force the US companies to look for other opportunities to fulfill their

technological requirements at lower costs; many US companies may offload work to

low-cost countries like India. Vandrevala clarifies this, "With companies

in the US being more squeezed towards their dollar budgets, outsourcing will

present a greater opportunity to them. Indian companies that were already

involved in outsourcing will probable look at it more aggressively."

Srivastava agrees, "The outsourcing business could benefit as people try to

cut down their budgets and yet seek to keep their development plans the same.

Indian companies should seek to move quickly into projects and offshore

outsourcing." According to Nasscom, by fiscal 2000, there were 185 Fortune

500 companies–almost two out of every five global giants–outsourcing their

software requirements to India.

The flip side

The dark cloud remains. As against the optimism, the US slowdown could also

imply that companies might tend to postpone expansion plans and investments in

new projects. Pant points out, "It is very logical to expect that the US

may outsource its IT requirements to India, but one actually needs to wait and

see if that really happens or not. It is possible that the US cuts its IT

spending all across, including outsourcing." Yet another factor would be

other countries competing with India as equally cheap outsourcing options.

Tanmoy Chakrabarty, VP, business development, EDS, states, "We have to

watch out for Ireland, Thailand, Philippines and Sri Lanka, which are also

English speaking countries and could be competitors to India."

With the markets tumbling, even the software giants’ stock prices took a beating toward the end of 2000

A definite consequence of this slowdown can be that Indian players will now

actively start looking at markets other than the US. Agrees Balasubramanian,

"It is so vital for us not to put all our eggs in the American market. The

slowdown is a blessing in disguise since India would now start looking at other

important markets like Europe, Australia, Japan and Korea." Pant agrees,

"The only way one can escape any slowdown in the US is by looking at other

markets." Also according to a Nasscom-McKinsey projection, though the US

will continue to be the major market for Indian software services, the

dependence is expected to come down. The report estimates that the US market

share will come down from the current 60% to less than 40% by 2008 with the US

generating about $18.3 billion of the projected $50 billion exports by 2008.

With a well-managed portfolio of clients spread across the globe, software

companies can escape unscathed from the US slowdown

The overall mood seems to be one of cautioned optimism. It, however, remains

to be seen whether the Indian software industry will have to bear the brunt of

the impending US slowdown or it will be able to leverage it as another business

opportunity. DQ