Indian software surges forward

HIGHLIGHTS 2004/ Competition, rising costs and appreciating rupee pose challenges

Indian IT companies have witnessed a huge demand surge over the last 12 months, producing strong topline growth and a positive management outlook for FY05.

As offshoring becomes strategic, size has become a major differentiator and large Indian companies are winning most of the incremental business. This is driving consolidation across the sector.

The hiccups of the dotcom and telecom busts have become things of the past and the global economy has grown through significant productivity increases brought about by IT spending.

According to industry analysts, the Indian IT sector's revenues can grow at 50 per cent in 2005 even assuming just 2-3 per cent growth in the US corporate IT spending. On the flip side, aggressive hiring due to a strong demand has led to high attrition and wage inflation amidst increasing worries over dollar depreciation.

Take the example of software bellweather Infosys. It continues to exhibit strong business traction. In 2Q FY05, it posted 15 per cent sequential Q/Q revenue growth and 15 per cent Q/Q net profit growth.

This translated into $44 million of additional revenues "" the highest in its history. Its visibility remains strong, with 5,010 net addition of people in the quarter.

The main contributing factor is the complete acceptance and success of the offshoring model by global companies. The fact that IBM, Accenture and others are using the same model as companies like Infosys and Wipro has made it clear to global consumers that this is the model for software development and growth.

Said Mukul Sharma a veteran in the Indian software industry and currently, MD, Unisys India: "Following the downturn, the Indian IT industry was faced with some degree of uncertainty. But, from there on, I think that over the last three years or so, the Indian industry has proved itself in the most difficult circumstances. As an old American saying goes, all boats go up in a rising tide. But to do things good when everything else is going bad, I think, is admirable. The resilience, flexibility and management of the Indian IT industry has truly proved itself in the last few years. We have seen a solid 25-30 per cent growth year on year since 2002."

Added an enthused Subroto Bagchi, co-founder of MindTree Consulting: "The biggest story of 2004 is the mainstreaming of India "" thanks to the IT industry. We survived the slowdown, 9/11, the Indo-Pak conflict, the Iraq war and finally, the Democratic poll posturing in the US. Now India does not need justifications "" if you do not do India, you probably do not do much."

Even as the controversy over outsourcing raged, mid-tier companies started realising the benefits of outsourcing and forayed into this space. These companies then set up aggressive targets to offshore to India. As a result, the industry gained maturity with a clear shift in the offshore delivery business model.

Explaining how the Indian software sector is maturing, Bob Hoekstra, CEO, Philips Software India said: "An eco-system is developing in which companies are not on their own getting business, but a network of companies with a mix of capabilities is helping to offer more attractive business opportunities to customers abroad."

The trigger for consolidation has been a change in the customer landscape and behaviour by large customers who now prefer vendors with size. With scale a major parameter for selecting vendors, Indian companies are eager to grow in size and demonstrate that they are capable of handling large offshoring projects.

Manoj Chugh, president, EMC India, noted: "The other paradigm shift I have been excited about is the resurgence of the domestic Indian IT industry. For too long the Indian IT industry has been dominated by software exports. It is only in 2004 that we have seen the domestic market grow faster than the export market. I believe this trend will also accelerate in 2005."

He outlines a number of external factors that have buoyed the domestic demand for the industry: a stable political climate lowers business risks; a resurgent manufacturing sector and focus on macroeconomic growth pushing local demand.

"However, it is important to realise that not all companies grew rapidly. It was mostly those in the ICT sector and those in the BFSI sector. These two industry verticals have been the early adopters as far as technology is concerned and I believe that while they have benefited from a positive climate, they are also realising returns from their investment in technology."

As India enters 2005 with anticipation of high growth and as it integrates further into the global economy, there are two emerging opportunities for the IT industry.

The first is the 7,500 small and medium-sized companies in India in automotive, auto ancillary, pharma, textile and agri-based and dairy products industries for whom new global business opportunities are opening up. They will look at IT to give them the globally competitive edge.

The second sector that holds promise, especially with the renewed government thrust, is the rural market. The slow and sure opening up of rural markets will change the way large companies have done business in India.

This invigorated market will demand changes in businesses delivery which will require an efficient, robust and integrated IT infrastructure to manage costs.

Said Shekhar Dasgupta, managing director, Oracle India: "In 2005, we will also see IT infrastructures being used for driving transparency in businesses. International norms in corporate governance will be adopted through better use of IT infrastructure. Accurate and up-to-date information will be the key. Businesses will modify and restructure their IT infrastructure to capture and consolidate information across their organisations."

He adds that "the demand for real-time information in banking and financial services companies, in government bodies dispensing citizen services such as income tax and utility services and in the services sector in general, will dictate the use of consolidated information architectures in more organisations in India."

Hoekstra adds a word of caution: "The growth of this industry is the result of a flywheel effect, and is slowing down. I have become less optimistic. Other countries are trying much harder, and our growth will come under pressure. We have not developed our competitive edge well enough, like progressing our language skills and liberalising and improving our education systems, and have made a mess of our infrastructure. The credibility so painfully built up, is under severe pressure. The tsunami is still in the ocean, but will hit us soon, I fear."