Software on a roll

As the Indian software story gets better and better, it is becoming increasingly intriguing how long such exceptional performance can continue. In the last quarter, five of the top six Indian IT players""TCS, Infosys, Wipro, Satyam and HCL""have between themselves registered a 40 per cent top line growth. When Cognizant's results come in, this figure is likely to be bettered. Even more significant is that the bottom line growth has outpaced this spectacular top line growth. Thus, billion dollar-plus companies are not only sprinting ahead but are also simultaneously improving net margins ranging between Infosys's 30 per cent and Wipro's 20 per cent. When Indian software firms first made a splash, it was widely assumed that their exceptional growth and profitability would temper once they acquired size. This has not happened for two reasons. First, there has been tremendous consolidation at the top with the big six accounting for nearly half of the industry's export turnover. Smaller players that neither have the capabilities nor the pricing premiums of the leaders are getting marginalised. All the top three players have reported better billing rates, Infosys leading with an around 300-basis point gain in its blended rate (repeat orders plus new ones) and TCS reporting a 89-basis point rise. In sharp contrast, over the last few years the industry across the board faced strong pricing pressure. Not only are global customers giving the top Indian players more business, they are simultaneously paying more for it. It is this that creates the feeling that the Indian software play has in many ways only begun.

The second reason for improving profitability is the leading players' ability to quickly go up the value chain. This has been achieved in large part through strategic acquisitions around the world, which have brought in high-end consulting skills in specific industry verticals. It is noteworthy that Wipro, which has been the most aggressive in making acquisitions, has reported that all its newly acquired operations have made a profit. It appears that this combination of high front-end skills and a large low-cost back end is proving to be an unbeatable combination. The global leaders are also aggressively acquiring a low-cost back end in India but they are yet to make the global distributed model work the way the Indian firms can. The latter are confident that they will continue to scale up rapidly as well as keep making significant acquisitions, sitting as they are on huge piles of cash. Thus, not only is software on a roll, it is likely to remain so for some time to come.

Is there anything that can set it back? The chance of a US slowdown is cited as one danger, as the Indian leaders are heavily dependent on the US for business. But they discount this by arguing that as the going gets tough for US firms they will end up offshoring more to cut costs. While this may turn out to be so, there is no clear answer to the other danger""a backlash in the West against offshoring. Many expect this to increase over time as more and more skilled people see their jobs being offshored and apprehend that a possible Democrat resident in the White House in two years' time will pay greater heed to such sentiment than is the case now. That seems to be the only development which could set Indian IT back.