BOMBAY, 28 April 2003 — India is primarily an agrarian country. Yet, the irony is that the country’s revenue comes mostly from software or information technology (IT) industry. But now, things are seeming to change rapidly once again.
The IT industry no longer looks like the pot of gold at the end of the rainbow. Things have changed so much that students who were earlier clamoring for computer degree courses, are no longer doing so. Earlier a software engineer was considered the best “catch” a father could bring for his marriageable daughter but now, the same engineer provokes little interest.
Even on the markets, IT stocks are no longer ruling the roost. Market punters say the IT boom is over for now and one should concentrate on banking and pharma stocks.
So what has brought about this sudden change? Fund managers have dumped tech holdings and are sitting on the sidelines waiting for a clearer picture to emerge.
Domestic software companies have faced stiff competition from multinational software majors who have set up shop in India for offshore services. For global service vendors, this is an effective way to cut their high cost structures as man-hour rates in India are about one-fourth of those in the US. Other factors like the slowdown in the US economy and the Iraq war have all worsened the situation.
The small companies have virtually no business and scores of them have closed. But what about the big companies? Looking at the results for the fourth quarter of the year ending March 31, 2002, it looks like even the big ones are in for a long haul. Even companies such as Infosys and Wipro have to adapt to lower rates and profitability in the face of serious competition. On one hand, pressure on billing rates has continued unabated and on the other, there has been an escalation in costs.
There has also been a phenomenal change in customers’ attitudes. Following the US slowdown, big customers have been hammering down rates in order to reduce costs. Clients now want to bundle projects and maintenance activities at lower, flat rates which is a major dent on profitability.
The rupee appreciation is another factor which has impacted the Indian software industry. As against extra gains due to a depreciating rupee in the past, companies have to contend with a marginal loss on the currency front. The continued appreciation in the rupee has impacted the margins adversely in the past two quarters.
Infosys is considered to be a benchmark for all domestic software services companies and its earnings guidance sets the tone for the sector in the forthcoming quarter. The Infosys management has indicated that the key assumption behind the guidance is that billing rates for FY04 will settle at levels prevailing in the fourth quarter of FY03 (January-March 2003).
This is based on the management’s assessment that the US will continue to waddle in recessionary trends for the rest of the year, and large US companies will be conservative in their IT spends.
Undoubtedly, the top-tier Indian software services companies have come under “price and margin” pressure and that is the reason why the market is hammering these scrips to saner price earnings (P/E) multiples.
So what does all this mean — will the Indian IT recall the past boom as a mere memory or will the sector get over this slump once the US economy recovers? Most of the analysts confer that the boom of the previous years may not come back due to the pressure on the margin on account of lowered prices. Even if the US economy recovers and orders come pouring in, companies will have to continue working at the same lowered billing rates as customers will not accept a hike in the rates, now that they have got to the vendor’s cost structure and got used to lower rates.
The bitter truth is that IT may no longer be the super grower which it was earlier but it is expected to bounce back on the bourses, as it remains relatively the fastest growing sector, though not as fast as before.