Bright outlook for India's IT
industry By Siddharth
Srivastava
NEW DELHI - Despite the
stock-market crash, the future looks quite bright
for India's information-technology industry. The
top three Indian IT firms, Wipro, Infosys and Tata
Consultancy Services (TCS), are reporting
better-than-expected first-quarter results,
strengthening India's position as the global
software hub.
This month India's
second-largest IT services provider, Infosys
Technologies, announced results for its first
quarter ended June 30 beating market expectations
on robust outsourcing demand from Western clients.
Net profit is up 19% at Rs7.94 billion (US$169
million,) a 40.2% year-on-year jump, while net
sales are > up 15% at
Rs30.15 billion (45.6% year-on-year rise).
Infosys said the company and its
subsidiaries added 38 new clients in the
April-June quarter, which also saw them taking on
board 8,097 employees,
boosting the total head count to 58,409.
"Our efforts in building brand, developing
the client base, and expanding strategic accounts
have fueled our robust organic model,'' said chief
executive officer, president and managing director
Nandan M Nilekani. Infosys rescued the stock
markets from a major plunge after the suicide
subway bombings in Mumbai.
India's largest
software company TCS posted 35% growth in net
profit to Rs8.83 billion on a 46% rise in income
to Rs42.27 billion in the first quarter of
2006-07. The company announced a dividend of Rs3 a
share.
"Growth was across the board," TCS
CEO and managing director S Ramadorai said.
"Financial services, retail and telecom saw
greater momentum during the quarter. New service
lines. such as business intelligence, assurance
and consulting. are also driving growth."
In terms of geography, the United States'
share in the total revenue dropped to 53.2% from
55.1% in the fourth quarter of the last financial
year, while those of the United Kingdom and
continental Europe rose to 19.9% and 7.8%,
respectively. The company added 62 new clients in
the first quarter and recruited 7,095 new
employees.
Wipro, India's third-largest
software exporter, announced its results for the
quarter ended June 30. Profit after tax grew by
45% year on year to Rs6.20 billion; total revenue
increased by 39% year on year to Rs31.43 billion;
global IT services and products revenue was
Rs24.51 billion, a 42% increase year on year, and
profit before interest and tax (PBIT) was Rs6.02
billion and grew by 45% year on year; operating
margin was at 24.6%, an improvement of 60 basis
points year on year. Global IT services AND
products added 62 new clients in the quarter.
Azim Premji, chairman of Wipro, said, "The
results for the quarter were quite satisfying; we
enhanced our strategic investments to sustain
long-term growth even as we continued solid
execution leading to improvements in operating
performance."
Rising wage costs If there is a cloud on this sunny horizon, it
is rising wage costs. There are fears that IBM
expansion plans will make it harder for Indian
software giants to retain staff. Rising salaries
will cut into profits. IBM, which has 43,000
employees in India, said last month that it would
invest nearly US$6 billion over three years to
expand its services, software, hardware and
research businesses. Multinational IT
companies that include Accenture, Affiliated
Computer Services, Computer Sciences Corp,
Electronic Data Systems Corp and Hewlett-Packard
are also looking at tapping into India's low-cost
skilled resources, which will cause further
manpower shortages.
Wages are already
rising faster in India than in other parts of the
region. According to the 2006 Salary Guide brought
out by Kelly Services India, the country has the
highest average salary increase at 13.9%, and
employees from the IT industry at 17.9% have
received the highest increase across all five
groups surveyed. Kelly Services is a global
provider of staffing services and solutions.
"This increase is of no surprise and is
the highest in India compared with the rest of
Asia since there has been heavy investment from
global companies," said Achal Khanna, country
general manager of Kelly Services for India. She
added, "India still maintains the competitive
advantage for providing the combination of the
most cost-effective and high-quality manpower.
Given the current economic climate, companies need
to pay added attention to their existing salary
packages and compensation benefits because it will
make a key difference in retaining good talent."
Earlier, surveys by Hewitt Associates on
salary increases in the Asia-Pacific region and by
Mercer Human Resource Consulting, an
employee-benefits consultancy and services
provider, projected salaries would rise more in
India than anywhere else.
Again, it is the
IT and IT-enabled-services sectors where the
maximum turnover is being witnessed. Faced with
high attrition rates and shortages of skilled
manpower, corporations have been doling out higher
salaries to retain staff, which is not something
that can be sustained over time.
India Inc
has been worried by the recent flight of companies
due to rising costs. It is one main reason (apart
from requisite manpower and infrastructure issues)
that firms such as Apple Computer and software
maker Pervasive and Powergen, Britain's
second-largest energy supplier, have recently
closed their outsourcing operations in Bangalore,
the Indian IT hub.
The National
Association for Software and Service Companies
(NASSCOM) has said that entry salaries have shot
up between 11% and 15% in the past few years,
while wages for senior managerial positions have
risen by a whopping 30%. Analysts have said that
labor arbitrage for India now exists only at the
entry-level where engineers earn about $9,000 a
year, about one-seventh of the wages for
counterparts in the US.
Consultancy firm
Stanton Chase International has said salaries of
managers with 10-15 years' experience in the US
were between $100,000 and $150,000, while in India
they were paid at least Rs10 million (about
$230,000). "During the start of the technology
boom the top management people were paid about
$65,000," said G C Jayaprakash, principal
consultant of Stanton Chase.
"The most
worrying factor [for foreign firms] is the steep
increase in salaries. Big companies such as Cisco,
Motorola and others are only hiring beginners and
at lower managerial levels. This is for the simple
reason that IT managers from the US can be
accommodated at a much cheaper rate," he said.
According to a study by IT research and
advisory company Gartner, "A lack of skilled
workers over time will drive up labor costs as
employees sell their skills to the highest bidder,
thus eliminating the cost advantages." Most global
Indian IT firms have begun implementing backward
linkages to cheaper locations such as China.
Questions have also been raised about the
quality of manpower, especially at the lower end.
Powergen announced that call centers in India
would no longer answer telephone calls from its
customers because of complaints about the poor
standard of service. According to NASSCOM, more
than 3 million graduates pass out of colleges
every year, and India produces 400,000 engineers
annually but "of this only a very small percentage
is employable".
But the overall picture
does look good. NASSCOM president Kiran Karnik
said last month that India's software and
back-office service exports are on course to reach
a target of $60 billion by 2010, from $23 billion
in the fiscal year ended March 31, providing
direct employment to more than 2.2 million people
and nearly three times that number by way of
indirect employment. Call centers are likely to
employ a million more by 2009. Estimated contracts
worth a combined $100 billion will be negotiated
over the next two years.
The Indian
software giants also have expansion plans in
place. Infosys plans to hire 25,000 people this
year. Its capital expenditure in the year to March
2007 is likely to be $400 million to $450 million,
mainly for development centers. TCS said last
month that it intends to invest Rs5 billion in a
new center in Pune. It plans to add a total of
30,500 people this year to a payroll of close to
64,000.
Siddharth Srivastava is
a New Delhi-based journalist.
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