Outsourcing surge may help IT revival

Laxmikant Khanvilkar

Mumbai, Oct 30: The software segment, badly mauled in the last couple of years, is slowly inching back to its earlier glory. Software giants such as Infosys, Wipro, Satyam have put up an impressive show in the quarter to September 2001. On an average, topline has grown by 40 per cent plus, with the bottomline being fattened even more, close to 100 per cent in some cases. Yet, the main challenge is whether this performance is going to be flash in the pan, or will these companies live up to their expectations in the future? The challenge looks harder in the post-September 11 terrorist attacks on the bastion of software sector, America. Major software stocks have receded by almost 15 per cent in market capitalisation (m-cap) after September 11.

Market capitalisation of software stocks rose from a negligible level initially in the nineties to as high as a third of total m-cap of Rs 5,00,000 crore by January 2000. This was well accompanied by exponential growth in the sector’s revenue.

However, since February 2000, the m-cap of software stocks has plummeted to current levels at around Rs 61,000 crore, down 88 per cent.

For instance, Wipro’s m-cap hit an all-time high of Rs 2,22,000 crore when the scrip hit a peak of Rs 9,624 (Rs 2 paid-up), Infosys peak m-cap touched Rs 90,000 crore, HCL Technologies (Rs 42,000 crore) and Satyam Computer (Rs 40,000 crore). Currently, these companies’ m-cap stands at Rs 26,500 crore, Rs 20,000 crore, Rs 4,070 crore and Rs 3,540 crore respectively, reflecting a drop of over 86 per cent during the period.

Loss of market cap is not yet over. The recession-ridden world economy is expected to grow by less than 2 per cent. The slowdown in the US and EU countries, the destination for Indian software products, has added a touch of uncertainty. However, according to the Global Research Advisory, Gartner Inc, the US slowdown will offer an opportunity to software companies in building new capabilities, tap new markets and attract more outsourcing work. Exports to the US account for around 70-80 per cent of the total exports.

In general the Indian IT sector is witnessing an interesting trend in terms of large global corporations outsourcing critical projects to India. According to Nasscom, the IT sector is witnessing the end of the first generation of the outsourcing model and the emergence of a new model. Traditionally, global corporations used to outsource 70-80 man year projects, but the trend now is outsourcing to the scale of 300-400 manyear projects.

Secondly, the Nasscom analysis of Indian software exports by vertical segments illustrates that banking and financial sectors have been a high-growth area, whereas the telecom sector has witnessed some slowdown.

However, post-September 11 period has seen insurance companies running for cover. In the financial sector, insurance segment has been by far the largest source of revenue for the IT sector.

Of late, the Indian IT sector has witnessed a remarkable shift in revenue generation towards fixed contract and away from variable contract. More fixed contractual obligations means lower billing rate that in turn exerts more pressure on earnings and margins. Fixed contracts, at times, are short- term in nature up to six month.
Yet, the current performance spells good news for the Indian IT sector, as well as investors who lapped up software stocks when the goinmg was good.