Software out of trough

Yet there is no indication of a return to the halcyon days

The surest sign of an economic recovery in the developed countries comes from the third quarter results of India’s top export-driven software companies, all displaying a confirmed upward trend on a sequential basis. However, the clear indication that a full-fledged recovery is still some distance away comes from the numbers not looking so bright on a year-on-year basis. In the case of Infosys, both net profit and revenue have grown sequentially by a modest amount but are down compared to those a year earlier. The picture looks brighter for TCS. Its numbers are exciting, whichever way you look. Wipro’s IT services revenues have also grown both year on year and sequentially. Of the three, it is TCS which has put up an exceptional performance, registering a rise in net margin for three successive quarters. The difference between the net margins of the top two, which used to be around 10 percentage points, with TCS trailing Infosys, is now down to four. The firm attributes this to the systems and processes it has put in over recent quarters bringing in the expected results.

Nearly all players report improvements in the two areas that matter the most, the US market in general and the financial services sector in particular which had taken the biggest hit over the last five quarters. Not only are volumes up, several $100 million-plus deals for the big players have also returned. Additionally, there are signs that discretionary IT spend, which drives transformational tasks and outsourced R&D effort, is also looking up. In view of this, the large players have announced a rise in their hiring plans for the coming year. But, the surest sign that things are not back to where they were earlier comes from the fact that vendors have not regained the pricing initiative. Significantly, through the entire slowdown, the Indian leaders had not lost control of their margins. They were able to ensure this in the face of slack volumes through strict price control, which translated into delayed recruitment of freshers and pale increments.

The better-than-expected results of the software leaders have given their scrips, which were trailing the benchmarks, a boost. But, there is no indication yet of a return to the halcyon days when the top line grew between 17 and 35 per cent and the margins were the envy of other industries. In fact, there is no sign that those days will ever come back. The current scenario is that as the Indian economy edges its way back to 9 per cent growth, resulting in high performance across sectors, software will keep pace, and not fall behind as had happened over the three previous quarters. Things can again turn exceptional for the Indian leaders if they are able to gain the consulting skills they have been lacking so far. Winning transformational deals indicates a beginning to moving in the right direction. One good sign is that there is a push to innovate. Infosys, for example, has filed 18 patent applications in the last quarter, won six in the US till date and has 219 applications in the pipeline. More of this will make a big difference.