High volumes, low margins is IT's new reality
ost September 11, Indian IT Incorporated already fighting a dwindling market for IT services, faced its toughest quarter ever. The brunt of the WTC attacks is evident in the weak third quarter results posted by Indian software companies in the first month of the new year. Any hopes of a quick rebound in 2002 was quickly dashed, as companies posted marginal increase in profits and admitted to sustained pricing pressure and falling revenues.
India's software giant Infosys failed to rally flagging market sentiment despite posting a 23 per cent increase in net profit. Other top tier companies such as Satyam Computer Services reported a 36.5 per cent in net profits over a year ago but an 11 per cent decline from the preceding quarter. Wipro failed market expectations by posting a mere 17 per cent increase in profits. In contrast certain mid-sized companies such as BFL Memphis which posted a 113 per cent rise in profit, Mascot Systems, which posted a 76 per cent rise in net profits and Tata Elxsi did rather well. They were the exceptions. Most other SMES such as Polaris Software, HCL Insys, Aztec Software Services, Hughes Network Systems were hard hit by the depressing economy. The mixed nature of the results notwithstanding, certain broad trends have emerged:
High volumes, low growth
Top software firms kept up last year's trend of adding 20 plus clients per quarter but revenue growth failed to correspond with growth in volumes indicating continued pricing pressure. For instance in the case of Infosys, revenue growth comprising volume growth of 3.4 per cent offset by a price decline of 3.2 per cent. "We experienced an increase in business volumes. However our quarterly revenue growth was impacted due to pricing pressures", admitted Deputy Managing Director and Head Customer Service and Technology S Gopalkrishnan in a company release. Similarly, Satyam increased volumes by nearly three per cent but prices fell two per cent. Another case in point is HCL. Despite adding 22 new clients increase in net profit was up by 1.29 per cent
Aggressive Client Acquisition
The cost effectiveness of Indian IT companies has always been an advantage for IT services companies. The drop in IT spending by US companies, intense competition among Indian companies for projects has forced a further decline in prices. To compensate many companies have doubled their marketing efforts and increased pace of customer acquisition. For instance, Wiper added 27 new customers in the quarter including 6 Fortune 1000 customers. Infosys added a record 33 new clients this quarter including marquee names such as Sun America Incorporated, Aizawa Koatzu Concrete and Target Corporation. Infosys Director and HeadSales and Marketing said: " By adding more mainstream customers, we continue to further consolidate our expanding customer base." BFL Mphasis added ten new clients this quarter including a large multinational bank, a global FMCG group and a large financial services provider. HCL Technologies Limited, India's fifth-largest software exporter added 22 new clients during the October-December quarter. The new customers included Japan's Mitsubishi, Serena Software Incorporated and Vetronix Corporation.
The focus on marketing services has also helped Indian companies to reduce dependance on US companies and penetrate newer markets. For instance HCL Technologies increased revenues from Europe by 9.2 per cent. Wipro's similar diversification pushed revenues improve revenue from Europe to 42 per cent in the quarter ending December 2002 from 28 percent in the corresponding quarter last year. Infosys acquired clients from Japan and Nigeria.
Diversified revenue profile
Traditionally, Indian software service companies have derived the bulk of revenue from low cost maintenance testing and development but the high volume low growth phenomenon is forcing companies to scale up the value chain. For instance, in the quarter ending 31 December 2002, HCL Technologies entered into a five-year partnership with Mapics Incorporated to provide product development in the area of extended enterprise applications. High value added services (Technology Development services, Software product engineering services and networking services) contributed 72 per cent HCL Tech's total revenues ." Forty-nine per cent of Wipro Technologies' revenues this quarter came from higher value-added businesses. Infosys entered into an agreement with ICICI to provide end to end financial services. Tata Elxsi announced that it would be foraying into the high-tech area of Bioinformatics.
The ramp-up the value chain corresponds with a continued effort to achives broad based growth. through diversified revenue stream Many Infotech companies are now foraying into IT enabled services to shore bottomlines. The revenue potential of IT enabled services can be adjudged from the fact that Service MsourcE, the BFL Mphasis his Group call centre subsidiary, achieved a 223 per cent growth in revenue from Rs 5.81 crore in the quarter ended 31 December 2001, as against Rs 1.80 crore in the corresponding quarter of the previous year. HCL Technologies tied up with Exult Incorporated this quarter, Infosys Technologies and Satyam Computer Services reported it was evaluating entry into the IT-enabled services space.
These trends indicate the psychological reality of the IT industry. Having gained a mind share in the global market, Indian IT companies are holding on. 100 per cent year on year profits may now be a distant dream, but companies are in no mood to be held permanently captive by the external environment. The IT industry may be proceeding slowly but it is weathering the economic storm by navigating steadily.
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