Though it was obvious that the US slowdown would hurt Indian software firms, an analysis of Q1 results of 26 companies by Pankaj Mishra shows that big firms have been hurt much less than small ones

When the World Bank issued warning to the Indian software Industry about an imminent slowdown in April 2001, NASSCOM denounced it and most of the tier one companies maintained that they would achieve ‘fancy’ growth rates. The bank’s lead economist on development prospects, William Shaw, added that downturn in the US economy could hit Indian software companies. India was proposed to take its annual software exports to $50 billion by 2008. But the Quarter 1 2001 results, when announced, brought the Indian software industry to a realistic level. Revenues fell and the sales cycle in the US became longer. Here we look at various issues dogging the Indian software industry including pressure on billing rates, attrition rates as well as the financial performances during Q1 2002.

Financial Performance during Q1 2002:
Despite the downturn, topline growth in Q1 2002 was higher than projected. However, sequential quarter-to-quarter growth came down menacingly. Infosys’ revenues grew by only 9 percent in the fiscal’s first quarter, compared to 30 percent in last year’s first quarter and Satyam’s by 6.6 percent compared to 18 percent. What is more, both Infosys and Satyam have admitted to pressure on billing rates. Cumulative net profits of the six leading Indian software companies including Satyam, Wipro, Infosys, HCL, NIIT and CMC fell 6.2 percent from the previous quarter, while net sales fell 4.9 percent.

Infosys profit up 50%:
Infosys’ net profit rose 50 percent in April-June from a year earlier, beating expectations, but the company said it was keeping its full-year revenue estimate unchanged (a 30 percent growth). Net profit rose 4.4 percent from the previous January-March quarter. “The slowdown in the US has undoubtedly affected the entire software industry in India. The economic environment continues to be challenging and companies around the world seek to realise higher returns on their technology investments. With the business environment becoming challenging, Infosys estimates a revenue growth rate of 30 percent for fiscal 2002. As part of a derisking strategy, Infosys has expanded into Europe and Asia Pacific regions. We have opened a number of marketing offices in these regions. Infosys revenues from Europe were 19.8 percent for the quarter ended June 30, 2001, as compared to 17.2 percent in the corresponding quarter, in fiscal 2001. Infosys revenues from the APAC region were 5.4 percent for the quarter ended June 30, 2001. There has been no significant shift in revenue from the US”,says Nandan Nilekani.

Satyam Q1 leaps 141.2%:
Satyam Computer Services, India’s fourth-largest software exporter, reported that April-June net profit jumped 141 percent from a year ago, but warned the US slowdown was putting pressure on billing rates. Satyam posted a 141 percent year-on-year net profit growth and a 9.1 quarter-on-quarter growth, reflecting its more diversified clientele and smaller exposure to the technology sector.

Wipro:
Wipro reported a 4.5 percent fall in net profit from the January-March quarter and a 15.3 percent drop in revenue. The company reported a jump of 97 percent in its net profit for the April-June quarter, compared with last year. Wipro also announced it has won a $70 million contract from a telecom subsidiary of the UK-based Lattice Group. “We consider this order

as the highlight of the quarter, it also marks our foray into the system integration business,” says J Shankar, Corporate Treasurer, Wipro. The Lattice order will be spread over a three-year period, but Wipro expects the project to generate $30m in the second half (October-March) of the current financial year. Analysts say the Lattice order should help Wipro compensate for its loss of business from core clients such as Alcatel, Lucent Technologies and Nortel Networks. The higher earnings came as the company adding 25 new customers this quarter and raised billing rates 20 percent for new customers. Wipro’s offshore billing rates for this quarter were 3.5 percent higher while the online rates registered a jump of 2.6 percent.

NIIT:
NIIT reports a 93 percent decline in the 1st quarter ending June 2001 profits: The company recorded a marginal profit of Rs 5 crore in the quarter ending June 2001 as compared to Rs 78 crore over the same quarter last year. Also the company showed a decline of 43 percent in its learning business and a growth of six percent in its software solution business in this quarter. The company’s global revenue has also come down from Rs 308 crore to Rs 236 crore in this quarter.

Polaris:
The Chennai-based Polaris Software Lab, posted a net profit of Rs 15.55 crore on a turnover of Rs 70.07 crore for the quarter ended June 30, 2001, compared to net profit of Rs 11.03 crore on a turnover of Rs 51.93 crore for the same period last year, a growth of 41 percent in profits. On a sequential basis, however, the company has reported an 18 percent drop in the net profit during the first quarter of this year.

Mphasis-BFL:
Mphasis BFL’s consolidated revenues for the quarter ended 30th June 2001 achieved a 13.3 percent increase over corresponding quarter of the previous year. Total revenues increased from Rs 632.9 million in the corresponding quarter last year to Rs 735.2 million in Q1FY02. However on a Quarter-on-Quarter basis, the topline of the company has come down from $18.1 million in Q4FY01 to $15.4 million in Q1FY02 reflecting a decline of 15 percent.

Billing rates:
Billing rates, the most talked about issue during this quarter, have triggered a never before ‘price war’ amongst the Indian firms. With the competition intensifying and the slump taking its toll, many firms have admitted to pressure on their billing rates. IT major Infosys expressed its pricing concerns. “We have experienced pricing pressures from both our existing and new customers. We have a yield management system that enables us to maintain our overall productivity above a stipulated level”, says Nandan Nilekani.

Chennai-based Polaris however, denies any pressure on its billing rates. “Polaris does not face any pressure on billing rates and does not foresee a situation like that,” says Raghuraman Balakrishnan, vice president-corporate communication, Polaris. The company’s billing rates hovered around $19.9 (offshore) and $64.25 (onsite) during Q1 of FY ‘ 02. Polaris’s billing rates for Q4 of FY ‘01 were $19.85 and 65.20 respectively for offshore and onsite projects. Infosys’ offshore billing rates have come down by 6 percent while its onsite rates have gone up, marginally. This is reflected on the company’s operating margins, which were down in the first quarter, by 1.8 percent as a result of a 2.8 percent fall in billing rates. Satyam also reported a decline of 3 percent in the billing rate. “We don’t perceive any pressure on the billing rates, what we are anxious about is the deferment of the projects,” says Ravi Ramu, chief financial officer, Mphasis-BFL. According to him, there has been no significant change in the billing rates and the company’s offshore rates have been hovering around $23.

Attrition Rates:
Satyam witnessed an attrition rate of 11.75 percent in first quarter of the current fiscal compared to almost 13 percent in the fourth quarter of last fiscal year. The fall in attrition rate is due to lesser opportunities and a general slowdown in employment rate within the industry. Infosys hired only 116, Satyam hired 221 technical professionals during the first quarter of the current fiscal year. Wipro also witnessed a fall in the attrition rates, from 15 percent during January-February-March 2001 Quarter to 12 percent in the Q1 of FY 2002. Mphasis-BFL reported attrition of 16 percent during the quarter as against 25 percent in Q4 of FY ‘01. Chennai-based Polaris however, witnessed no change in its attrition rate, which remained at 14 percent during Q1 of FY ‘02, same as the Q4 of FY ‘01. Infosys also showed a gross addition in employees at 315 for the quarter, including 102 lateral hires - net addition in employees at 116 for the quarter. “The utilisation rate including trainees was 69.5 percent in the quarter as compared to 64.9 percent in the quarter ended March 31, 2001. The utilisation rate excluding trainees was 73.2 percent in the quarter as compared to 73.0 percent in the quarter ended March 31, 2001,” says Nandan.

Advantage outsourcing:
With the ongoing slump becoming more pronounced, offshore outsourcing has emerged as the best option for the Indian firms. “As the companies in US realise cost effectiveness in outsourcing to the Indian companies, it is going to play a key role in the coming quarters,” says Dhanpal Jhaveri, KPMG India. From the people’s perspective, the shift in emphasis from ‘onsite’ to ‘offshore’ would see the Indian software firms bringing back their employees to India to cut down costs, believe analysts. “The business model of Indian IT companies primarily revolves around efficiency, quality and cost-effectiveness. The last two quarters have also seen a large number of ‘senior level decision makers’ from several large corporations around the world, visiting a number of Indian IT corporate and contemplating their projects to be outsourced in India,” says Raghu of Polaris. Already, around 20 percent of the top 1,000 US companies outsourced their software requirements from Indian firms. According to a Merrill Lynch survey, although only 14 percent US companies were outsourcing their software requirements to India in 2000, 46 percent were considering this option during 2001. “As the Indian companies face the downturn, offshore outsourcing stands to play an instrumental role in sustaining growth,” says Shankar of Wipro. At present, the outsourcing pie in the US is about 25 percent of the total spending on IT services. This figure could also increase in the coming months. The layoffs announced in the last few months by US majors like Cisco and GE will increasingly move job opportunities from US to India.

An alarming trend:
As the global tech spending worsened, the Indian firms began scrambling for volume business during the first quarter. But the kinds of orders bagged by the Indian IT majors during the quarter are suggestive of an alarming trend—companies are reverting to mundane work including maintenance and system integration. Maintenance projects’ contributed 28.6 percent of the total revenues for Infosys up from 27.5 percent in Q4, last fiscal. Even Sat-yam was down on the value chain, whose maintenance projects contributed 29.76 percent of the total revenues compared to 23.17 percent during Q4, last fiscal. The trend is also quite pronounced in the Wipro’s system integration order from Lattice group, which is worth $70 million. The Indian software industry now faces a daunting task in moving up the value chain. The software training and services firm, NIIT, which saw its net profit tumble 93 percent, has also announced that it has established maintenance and modernisation practice and the revenues from the same are increasing.

Summary:
The analysis shows that the slowdown in the US economy has had a major impact on the second and the third rung companies, while the top companies were relatively unscathed but they too are feeling a slowdown in business. While the Tier II and III companies have seen a q-o-q decline in their revenues and profits, Tier I companies have seen a deceleration of growth rates. The major impact on the top companies would be seen in Q2 FY2002. While this might be true for most of the tier one and tier two companies, tier 3 companies seem to be losing ground. “What we are witnessing is the decline in the growth rates, I don’t perceive any negative growth as such,” says Shankar of Wipro. Recently, IDC came out with several guidelines for the Indian software firms in the wake of the US slump. It suggested bringing ‘shift’ in the business models rather than scouting for business in geographies other than the US. It also suggested that the companies should survive falling billing rates and rising cost of revenue by polishing services and developing softer skills.