The increasing competition for a shrinking pie in the software service sector will result in realisations for the industry as a whole coming down

However, the second quarter results of most of the software service companies have borne out the truth of the Infosys management’s reading of the future, and more and more companies are paring their projections. The slowdown has affected all companies, big and small.

However, the results have been a mixed bag. To take one instance, blended billing rates at Infosys grew at 2.1 per cent sequentially, against analysts’ expectations that billing rates would be lower. Similarly, the high growth in revenues at Wipro was possible only because of higher realisations — offshore billing rates were higher by 2.5 per cent sequentially, while onsite billing rates were 4.6 per cent higher.

Volumes, on the other hand, fell 3.7 per cent over the June quarter. On the other hand, there has been pressure on billing rates at Satyam. But there is little doubt that, while a few companies may hold out against the trend for a while, the increasing competition for a shrinking pie will result in realisations for the industry as a whole coming down.

Innovative ways of giving discounts are being tried out, such as asking employees to work on Saturdays without billing for their work. However, the earnings growth in the face of a massive slowdown in the IT sector is commendable, although it is the larger companies that have been able to keep earnings growth intact, while the smaller ones are getting decimated.

Yet another rather obvious trend has been the containment of expenses. Staff costs have been reduced and linked to performance. Yet the top-rung companies have been able to add clients, and some of them have also increased their staff.

Companies which are in the education business have been very badly hit, because their gamble to increase the proportion of earnings from software services hasn’t worked. In fact, it now turns out that both software education and software services are closely linked, and the diversification into services has not been the hedge it was supposed to be. Together with lower growth in volumes, there has also been a deterioration in finances of clients, as a result of which receivables are getting stretched.

However, analysts caution that the picture could get much worse. The terrorist attacks in the US have had only a small impact on the second quarter earnings. The fallout from that event will hit software service companies only in the coming quarters. Significantly, the guidance emanating from companies is very conservative, with several warning of flat growth for the rest of the year.

Since many US companies decide on their IT budgets in December, the guidance that Indian software service companies give at the end of the next quarter will be significant. There is also every possibility that new business will fall off after ongoing projects are finished. In short, the worst is yet to come. As for the outlook on software stocks, that will clearly depend on the hope for a recovery in IT spending in the US, of which there is as yet no visibility at all.