IT cos face new challenges as sector matures

MUMBAI, INDIA: Currency movement is not the only factor that is proving to be a nemesis for the Indian software industry. Analysts point out that currency issues apart, IT companies would find it difficult to continue growth due to the large base effect that has built up over the success of past few years.

The Indian software industry has been pressurised by factors like slowdown in topline growth due to the base effect, concerns of a slowdown in the US, margin pressure due to wage inflation, and rising MNC competition, industry experts say.

An India Infoline research report on the sector points out that the industry is finally entering the mature phase and maintaining the pace of growth would be a tough task for many companies.

“The Indian software sector, we believe, is facing multiple headwinds. Leaving aside quarter-to-quarter performances that could still show divergent trends, our longer-term prognosis is that the road ahead is much more arduous than the consensus seems to believe. Further growth scalability is contingent upon change in business models that will necessitate higher investment.”

It says rupee is set to appreciate even higher and the upward pressure on wages will likely exacerbate. The terminal earnings growth rate assumptions for the sector will need to be toned down.

Most top-tier software companies in India are easily among the best-run and have proven track records of managing risks; but the coming headwind hurricane will hurt all, nonetheless.

“After having enjoyed over a decade of highly-profitable growth, initially by virtue of labour arbitrage, the Indian software industry is at a crossroads. Its business model is fast approaching the maturity phase,” the report says.

It adds that Indian IT frontliners have to compete with their MNC rivals such as Accenture and EDS, who have aggressively expanded their Indian operations — and thus enjoy the same offshore cost advantage that Indian firms have enjoyed for so long. It would not be easy to demand and get billing rate hikes in such an environment.

It believes that business models of most software companies need to change if they aspire to report even moderate growth rates in the medium term. “The off-shoring model, essentially evolved out of the ability of local companies to arbitrage wage costs, now needs to move to the next line,” the report says.

Sensing this, top Indian companies have already changed their business models. What they need to do more is to de-link revenue growth from head count. This will almost certainly entail short-term margins to secure growth and sustainable margins in the long term.

Source: Agencies