Traction for software

BS OPINION

Three high-profile companies of varying sizes that do not operate in identical industry verticals "" Infosys, Mphasis and Hughes Software "" have all reported good-looking numbers.

They have all bettered their own guidance and there has been a partial revision of guidance for the rest of the year, creating the hope that the trend established in the first half will be maintained.

There is reason to believe that this recovery may be part of a broader trend, as Hughes Software operates extensively in the telecom space which was the hardest hit after the tech bubble burst in 2000.

The company sees telecom opportunities coming back slowly as its large clients achieve stability. It is to be hoped that investment in new technology in the telecom sector will in time begin to revive, thus taking care of some other companies in the product, as opposed to the services, space of the same industry vertical.

The durability of the recovery is underlined by several factors. Volume growth, which was targeted last year to protect revenue during pricing pressure, remains robust and shows every sign of being sustained.

This underlines the arrival of 'offshoring' of which India is the biggest beneficiary. The industry is also confident about the sustainability of this rapid volume growth and so has sharply hiked recruitment in the current year.

In fact, this year is likely to see a major rise in the industry's headcount, reminiscent of the boomtown days. And to make things even better, margins have improved across the board despite rupee appreciation.

If an industry can hold its own globally during a period of currency appreciation, then it demonstrates continued global competitiveness.

But it is not entirely back to business as usual, as the pricing scene remains mixed. While Infosys sees easing of pricing pressure, Hughes Software sees it continuing.

But the rate of bottom line growth is clearly accelerating and this reflects improving margins, which is partly the result of greater offshoring.

As offshore billing rates are far lower than on-site rates, more offshoring is leading to lower revenue growth. This is partially offset by volume growth.

But offshore rates, though lower, bring better margins. As volume growth will continue riding on the back of offshoring, margins will be protected and perhaps get better if pricing pressure eases off entirely.

This has begun but the challenge before Indian software is to become non-cyclical. It can do this by going up the value chain and earning better margins despite clients seeking to beat down prices through renegotiation.

This is achieved by offering more end-to-end and business solutions, which means acquiring consulting capabilities, and offering products and not just services.