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India's IT sector rides a
wave
By Indrajit Basu
KOLKATA - A slew of earning reports of software development
and services companies and surging hardware sales in
India have confirmed what industry watchers have been
crooning for some time now: The tech recovery in the
country has set in finally, clearly putting its almost two-year-long
slump behind it.
Analysts say that
the latest quarterly earnings posted by blue-chip
software companies clearly indicate that recovery is on
its way. "I think it is becoming increasingly clear that
we are past the bottom, and the gloom that had overtaken
the sector is giving way to hopes of recovery in the
months ahead," said Neeraj Deewan, an analyst with
Quantum Securities.
Exceeding all expectations,
the country's software heavyweight, the Nasdaq-listed
Infosys Technologies (which not only dictates the
sentiments of the country's IT sector, but also to some
extent its old economy sectors), announced its latest
quarter performance in early October that rode on a 32
percent rise in software revenues - US$181.4 million -
to register a 13 percent spurt in net income - at $46.7
million - for the second quarter ended September 30,
over the same period quarter last fiscal.
Subsequently, a few more of the
country's top software companies, such as Wipro, Satyam
(although this company reported lower profits but very
impressive top-line growth), as well as subsidiaries of
top US-based companies like Syntel, Cognizant and Hughes
Software Services, surprised analysts with impressive
top-line and bottom-line growth. Quite a few mid-tier
companies, including mPhasis, Visualsoft,
Mastek and Geometric Software, also surprised with
impressive performances.
The reversal of fortune
has not been restricted just to software companies.
According to a release by Manufacturers Association of
Information Technology, the industry lobby for hardware
companies in India, "The market has shown signs of
recovery with sales in almost all product categories
amounting to two-thirds of that sold in the last
fiscal." It added that the sale of IT products in the
first half of the fiscal 2002-03 (April 1 to September
30, 2002) is expected to comfortably exceed that in the
first half of 2001-02, "showing definite signs of market
recovery".
But what really is setting the
industry aficionados' hopes on fire is the restatement
of revenue guidance upwards. Almost all software
companies that have declared their quarterly performance
so far have either upped, or at least maintained, their
revenue for the full year ending March 2003.
For
instance, "We had a robust quarter and we see business
ahead," said Nandan Nilekani, Infosys CEO, adding that
the latest performance had given him the confidence to
restate his outlook for the quarter ending December 31,
2002 and the fiscal year ending March 31, 2003.
According to Nilekani, Infosys's net revenues
could reach $187 million by December 31 and $715 million
by March 2003. He added that earnings per American
Depository Shares could touch $0.39 and $1.48
respectively for the above periods.
Similarly,
buoyed by increased offshoring by its customers,
Cognizant Technology India has raised its revenue
guidance for the full year ending December 2002 to $226
million from $218 million. And, commenting on its
results for the quarter, Wipro chairman Azim Premji
said, "We should see the momentum in volume growth of
the last two quarters continue."
So, what has
caused this unexpected turnaround in the industry's
fortunes?
"Over the past few months we have seen
the ever-increasing focus by large global corporations
on outsourcing their technology needs to Indian
companies," said Ravi Mehrotra, chief investment officer
of Franklin Templeton Investments, adding, "What has
prompted this is their internal pressure to optimize
their budgets at lower costs and through higher
productivity. What Indian companies have achieved to a
large extent over the past five-odd years is to
establish and prove that IT outsourcing to remote
locations is both feasible and makes strong economic
sense."
According to Jaitirth (Jerry) Rao,
chairman and managing director of mPhasis, the downturn
in the global IT sector has actually come as a boon for
the Indian IT sector. "There is no increase in IT
spending in the US or anywhere else in the globe," he
said. "Yet the good news is that India as an outsourcing
destination is getting more visibility. More awareness
about India is helping big domestic software service
vendors to get more business."
Aggressive hiring
is also a signpost that suggests improving fortunes, say
analysts. All leading Indian IT companies have stepped
up recruitments lately. For instance, Infosys and Wipro
have begun taking on board recruits that they put on
hold a year ago. And Mumbai-based Tata Consultancy
Services, Asia's largest software services company,
hired more than 3,000 people in the past year and
expects a similar trend this year.
The National
Association of Software and Services Companies -
NASSCOM, India's apex industry lobby - has cited other
reasons for its conclusion on the reversal of the
sector's fortunes: first, a hefty increase in the
average size of contracts signed during the second
quarter, second, billing rates are now beginning to move
northwards, and, third, an increase in the number of
first-time client visits to the country.
NASSCOM
vice-president Sunil Mehta said that top-notch Indian IT
companies were high on the list of global players and
that these top companies had been routinely bagging
multi-year offshore contracts valued at about $75
million, or 300 man years. "Earlier, the size of
contracts was smaller - $10-15 million, on an average,
though this was distributed among several IT companies,"
said Mehta.
More importantly, NASSCOM studies
also point to an easing of pressure on billing rates. It
says that average billing rates have stabilized in the
$22-25 per hour range, with the larger IT companies
managing to command a premium in most cases.
"Billing rates had dropped to a low of $18
an hour or even less earlier this year," said
Mehta, adding, "The number of first-time clients visiting the
country has also increased, with about two to three new
clients visiting India every week seeking to rope in
Indian IT vendors."
And further, India's IT
is also on top of the world. A NASSCOM analysis
reveals that the country's top five IT companies are the
most profitable, and they also enjoy high market
capitalization among all the full-fledged IT services
firms worldwide.
NASSCOM says that Infosys is
the most profitable among the world's purely IT services
companies, followed by other Indian companies such as
HCL Tech, Satyam, TCS and Wipro. The sixth slot is
occupied by Cognizant, which is US-based but which has
extensive operations in India.
In terms of
market capitalization, mega-IT services player US-based
Accenture is the largest, with a cap of $12.4 billion as
of October 2002. The NASSCOM analysis puts TCS at second
position, estimating its market cap at $8.1 billion and
Infosys, with a market capitalization of $7.14 billion,
at third.
The world's largest IT services
company, the US-based $22-billion (revenues) EDS, is at
fourth position, with a market cap of $6.34 billion. EDS
is followed by India's Wipro, with $6.34 billion, while
the $11-billion US-based Computer Sciences Corporation
comes next with a $4.8 billion market cap.
According to NASSCOM,
Infosys enjoys an operating margin of 32 percent followed by HCL
Tech with 28 percent. Satyam is No 3 with 28 percent, TCS is No
4 with an estimated (because TCS is unlisted ) margin
of 25 percent, and Wipro is No 5 with a margin of 24
percent.
Among global players, EDS has an
operating margin of around 10 percent, while Accenture's
is 3.9 percent and Keane has 2.1 percent. The NASSCOM
study excluded IT services divisions of companies that
are into other activities as well.
(©2002 Asia
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