Editorial: Battle-hardened

India's vaunted software majors need to live up to the aphorism that when the going gets tough, the tough get going. The last year (2007-08) has been particularly tough for the export-driven industry, as it was hit by a 12 per cent appreciation of the rupee against the dollar when the US accounts for well over a half of its global market. The prospects for the current year (2008-09) appear to be even worse, as the industry is faced with a slowdown in orders as the US economy is convulsed by the consequences of the sub-prime mortgage crisis and the onset of recession. The order pipeline has been further affected by the fact that the industry is heavily dependent on the US financial services industry. As if this were not enough, the longer-term future holds a broader uncertainty, with US presidential candidates speaking out against offshoring as well as large-scale issuing of visas to foreign professionals. In view of all this, the industry is busy trying to figure out whether the year will turn out to be worse than the turn of the last decade when three setbacks "" bursting of the technology and telecom bubbles and the 9/11 episode "" came in a row. Already, most investors have accepted that the phase of rapid growth is over for the sector, and that margins cannot be what they were a few years ago. That explains why price-earning multiples have dropped to the mid-teens. One question this year is whether the industry will hit or miss by a small margin the $50 billion export target that it had set for 2008.

In this situation, first Infosys and then Wipro have projected forward to a year when they will not be able to get the price rises they have been winning for the last few quarters and will be barely able to maintain margins. Yet, the markets have swallowed something as grim as 3 per cent top line growth for Wipro, and even given a boost to IT valuations over the last week "" apparently for two reasons. First, the industry has done remarkably well over the course of the last year in clawing back some of the advantage that it had lost through the currency appreciation early in the year. Infosys, after growing its top-line at well over 40 per cent in 2006-07, managed to clock slightly less than 20 per cent growth in 2007-08. But remarkably, it lost very little by way of margins. Wipro's growth performance has been even worse, yet some ratios are holding up pretty well. TCS, whose results are yet to be announced, will certainly not be able to repeat the handsome bottom line performance of 2006-07, but its margins too could remain unaffected. The market sentiment has been set by Infosys projecting 20 per cent growth in its top line and maintenance of margins, despite the tough exchange rate and order positions.

The best in Indian software appears to have displayed a robustness that both cashes in on opportunity and rides out the tough phases. This is because it has been able to bring in continuous productivity improvement that has absorbed rapid growth in the salary bill. Plus, the business model has kept changing with the journey up the value chain, the ratio of maintenance and development work giving way to systems integration and implementation of total solutions. Some of the top players have also gone on an aggressive acquisition spree, which has resulted in securing both near-shore capabilities and local staff, thus turning the firms into truly global entities.