Change of mood

Indian software has put in a remarkable year (2003-04), going by the financial results being announced. Market leaders Infosys and Wipro have boosted a return to optimism about the industry by announcing generous bonus issues as also special dividend payouts.

But the full dimensions of what has happened through the year cannot be understood merely from the way it has ended with a bang; it is necessary also to recall how the year began on a sombre note.

In April 2003, Infosys set the tone for the industry by issuing a guidance that was below market expectations, and caused software stocks to tumble across the board. The conservative forecast was prompted by the Iraq war and the Sars epidemic which between them could deal a severe blow to an industry as global as software.

Plus, there was bad news from two other fronts. Indian software companies faced pricing pressure as also new competition from the international software companies, which were starting India development centres and matching their Indian rivals' costs.

But by the year-end, not only were the war and the epidemic distant memories, there was good news on other fronts. Pricing pressure had eased, new business was rolling in, and the momentum was back.

The quarter-wise results have demonstrated how the situation was tough to begin with and how matters improved with the passage of time. In the year as a whole, industry leaders have posted top line growth ranging between 30 and 60 per cent.

More important, margins have held steady or improved. Infosys's net margin held steady, whereas both Cognizant and MphasiS improved it by 300 and 140 basis points, respectively. Wipro, which has several businesses other than software, improved the operating margin of its global IT business by 250 basis points.

Wipro's chairman Azim Premji was speaking for the entire industry when he characterised the year as one during which "we demonstrated the resilience of our business model".

The Indian software companies benefited from global trends, to be sure, but they also displayed their ingenuity. It was a year when outsourcing snowballed as a business, despite gathering political storms.

This continuing outsourcing trend took care of Indian top lines. Indian companies, particularly industry leaders like Infosys, were able to capture the new business by rapidly expanding their operating infrastructure and recruiting rapidly so as to add to employee numbers, thereby highlighting their ability to manage scale.

But maintaining margins was a tougher task because of the upward pressure on the rupee and the need to raise staff compensation so as to counter the inducements being offered by the newly arrived global firms. Indian companies responded by cutting non-staff costs, and by taking advantage of expanding volumes.

The current year offers bright prospects but in some ways could be as challenging as the past year. But with three Indian companies having crossed the billion-dollar mark, it will be easier to secure bigger orders. But maintaining or improving margins will remain a huge challenge.