India's bruised tech sector sees no early rebound

Anshuman Daga

BANGALORE: Top Indian software exporters face at least one more tough quarter

until they can expect some recovery signs in the once high-flying sector,

struggling with softening demand and intense pricing pressure, analysts say.

Stagnant growth in quarter-on-quarter profit and sales reported by leading

companies during October-December came as no big surprise to the market but

cautious comments about near-term prospects disappointed investors.

"The most surprising thing is that the ramp-up from many new customers

who are giving maintenance work is not happening while the ramp-down is

happening at a faster pace from existing clients," Sujit Sahgal, head of

Asian software services at UBS Warburg, Singapore, told Reuters.

In the past quarter, India's software sector bore the brunt of the September

11 attacks in the United States as corporate clients hit the brakes on spending

and projects got cancelled.

The United States accounts for 60 per cent of India's software exports that

topped $6.2 billion in 2000/01 (April-March). India's software association has

cut the nation's export target to 30-35 per cent in 2001/02, down from 55 per

cent in the previous year.

Indian firms, which get the bulk of revenue from low-cost software

maintenance, have raised volumes amid price pressures. "There is no doubt

that the customer is the king and this is a buyer's market," B Ramalinga

Raju, chairman of Satyam Computer Services, India's fourth largest software

exporter, told Reuters.

Despite its top strong brand name, Infosys Technologies, India's

second-largest software exporter, boosted volumes by over three per cent last

quarter after taking a similar hit in prices offered for its services.

Satyam increased volumes by nearly three per cent and prices fell two per

cent. "I would say that besides the demand issue, it's also important to be

cognisant of the fact that new deals are likely being closed at lower price

points," said Anil Tewari, Hong Kong-based analyst at Goldman Sachs.

Sliding profit growth



India's cost-effective software army caters to a wide customer range,
including financial giants and telecoms equipment makers. While price

competitiveness has been its strong point, the slowdown that hit last year has

made it a necessity.

Turmoil triggered by the collapse of a large number of Internet firms and

wrong bets placed by telecoms equipment makers ended a dream run of dizzy annual

profit growth of nearly 100 per cent that top Indian firms reported for about

five years.

In the third quarter, net profit at Infosys crawled up by just two per cent

from the preceding quarter. Wipro, the No. 3 exporter, showed a three per cent

rise. Satyam's profit dropped by 11 per cent.

"The differential growth rate between the technology and other sectors

is not that as high as before," said Samir Arora, head of Asian Emerging

Markets at Alliance Capital, which has about $550 million invested in Indian

markets - about 35 per cent of it in technology stocks.

Infosys' sales rose less than two per cent quarter-on-quarter. Wipro had flat

sales while Satyam's fell about two per cent. Top software firms kept up last

year's trend of adding about 25 clients every quarter, but new clients came at

cut rates.

Most software shares, among the worst-performers in 2001, saw a surge in

prices earlier this month but failed to hold on to the gains. They are still

underperforming the broader market.

Wipro, which warned of a nearly five per cent drop in sales in the current

quarter, said the next financial year continues to be surrounded by uncertainty

while Infosys said there "continues to be fog on the windshield."

Satyam, however, expected software sales to grow by at least 44 per cent in

the full year, up from the earlier 30-33 per cent target, which analysts said

had been conservative. Infosys has retained its 30 per cent sales growth outlook

for the full year.

"In an environment where customers are not giving guidance, it's

difficult to expect these companies to have good visibility as well," said

Goldman Sachs' Tewari. Big software companies, which once hired in advance to

meet growing demand, have now resorted to low-key layoffs, mostly disguised as

performance-based exits. Campus hires are out.

(C) Reuters Limited.