Business Today Net Special

Software's Third Quarter

If there's one industry that should be reeling under the aftermath of the September 11 attacks on America, it should be Indian software. Sure, companies are projecting a slower pace of growth. But that could be 30 per cent!

By Ashutosh Kumar Sinha

Less, But Still A Lot

If the second quarter results of Infosys' were a sweetener for the stock market, the bitter pill - and the market will indeed have to swallow quite a few of them - is not very far away.

Infosys reported a commendable six per cent increase on its Q1 net profits, from Rs 190 crore to Rs 201.56 crore. It added 28 new clients during the quarter, several of them after the September 11 (or 911 incident, as it is being referred to) disaster in the US.

The Infosys results, however, should hardly serve as the benchmark for the IT sector. Barring the large companies, Wipro, HCL Technologies and Satyam Computers, the others could see their fortunes dip in the coming months. A preview of that has already been witnessed with the IT education stocks like NIIT and Aptech, and the software services wannabes that have seen their market value erode by nearly 90 per cent. With the war in Afghanistan threatening to carry on for a long time, it is the smaller companies that are expected to feel the squeeze even more.

"The real test for IT companies will come in the third and fourth quarter," says Sujay Chohan of Gartner Group. It is not difficult to understand why Chohan is saying that. Analysts expect that when the large US and European companies outsource their application and IT requirements, they will choose to go with the big companies in the Indian market. Size and branding, therefore, assumes critical importance, even helping in closing deals after the September 11 incident.

The biggest names will be very closely watched when they make their announcements for the quarter ending December. Those with a strong presence in vertical segments like insurance and hospitality sectors would be closely watched. Infosys has nearly 16 per cent of its revenues coming from insurance while the figure for Wipro is four per cent and Satyam 16 per cent. However, for a number of Indian companies, maintenance accounts for over 25 per cent of revenues. That, given the nature of annuity business, should continue to be stable.

What should be music to the ears of large companies is that help is coming from unexpected quarters. The depreciation of the rupee during the second quarter is estimated to benefit Infosys by Rs seven crore and between Rs 16-20 crore for Satyam and Wipro each.

But the fact that a few deals were closed by Infosys after September 11 needs to be seen in the proper context. The negotiations would have perhaps been going on for several months before the companies inked the deal. The big challenge should now be to see whether there are as many contracts that can be signed up during the next two quarters.

Getting customers will not be easy for companies like mascot systems, DSQ software, and Sonata systems that are still hawking outsourcing on the basis of cost advantage that it brings. However, the second rung companies like Polaris are focused on the banking and financial services market, which accounts for 24 per cent of the world-wide technology spending. So, it should not be surprising to see some IT services companies shut shop and, perhaps, hunt for their pot of gold in the new emerging sectors.

Says the Mumbai-based Bhupinder Ahuja, Vice-President DB Alex Brown, "Companies which are focused on a niche segment are better placed to sail through the current scenario than those which are still trying to sell on the basis of cheaper cost."

The software industry's mouthpiece Nasscom has suggested that the Indian industry will continue to grow at over 35 per cent, to reach the US $50 billion exports target by 2008. However, with war clouds looming large, Nasscom is not willing to stick its neck out to predict the numbers for this year. Therein, perhaps, lies the answer!

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