India - Software: Better Revenues, More Avenues

India Infoline News Service | Mumbai |

An exceptional period of lull and gloom now makes way for a steady revival that has already placed some of the leading Indian IT vendors on a trajectory of super growth.

An exceptional period of lull and gloom now makes way for a steady revival that has already placed some of the leading Indian IT vendors on a trajectory of super growth. 

The Indian IT industry is undoubtedly emerging, almost phoenix-like, from the gory shadows of the 2007-09 slump. The rupee depreciation and zero wage inflation have contributed substantially to this recovery. For one, pricing for corporates has been relatively robust compared to previous slowdown, what with leading Indian IT vendors yielding much smaller discounts and no new negotiations on pricing cuts. There are strong signs of a return of discretionary spends which should see an upward pricing trend from the second half of FY11.


And while industry salaries have grown following an 18-month slump, manpower-scarcity driven wage inflation is unlikely to follow suit, given the excess supply of over 5 lakh engineers in the market.


It’s prudent to analyze the top margin boosters that have scripted such a scintillating story of rising margins for the industry: 



Supply-Side Flexibility


  • Compared to the pre-slowdown years, the pay hikes, a significant margin eater for the industry, have been significantly lower this time. While the offshore wages have been in check, the onsite hikes are almost negligible. The salary packages now account for more of variable components to protect margins.

  • On the other hand, the sharp slowdown in FY09 and FY10 has created a manpower glut, at the start of FY11, of 5 lakh engineers, large enough to meet the industry hiring needs for two years. Given the healthy growth in the engineering colleges of India, the youngest demographic profile among the BRIC countries and improving enrollment ratio in education, the long term supply situation in the IT industry seems best placed.

  • The industry has shown a marked preference for semi-engineering and non-engineering recruitments - that are cost-effective and abundantly available. And contrary to fears and doubts, the performance of the non-engineering brigade has been at par with their engineering counterparts.

  • The IT vendors are aggressively building development centers in low-cost countries reducing the dependence on Indian engineers.  

 


New Demand Waves

 

  • During the past seven years, offshoring has never been prominent for most IT companies. But the FY08 has shown signs of an increase. During the 2008-2010 slowdown, the need for cost cutting paved the way for a surge in offshoring to India. Companies like TCS have registered a sharp rise in its offshore-led revenues. Large US MNCs like BT and GE now offshore 90 per cent of their work to low-cost havens, primarily in Asia.

  • Indian IT vendors are now showing more participation in Fixed-price projects that call for timely deliveries. Indian companies have been traditionally pitching for the T & M model that kept them away from the action of bigger stakes till date. This will also help the Indian industry’s enhance its credibility in multi-service deals vis-a-vis MNC solution providers going forward.  New areas like core R & D, strategic IT consulting and total outsourcing have opened up like never before. Wipro, for instance, increased the share of fixed-price projects from 27 % in FY08 to 41.5 % in FY10 through price model shifts with clients.   

  • Credible investments in non-linear business models like infrastructure service, transaction BPO and platform-based solutions augur well for the Indian IT vendors. This should spell more revenues and client wins in the near future. Companies like Wipro, TCS, Infosys and HCL Tech have made smart inroads on this front.

  • The US software spending is recovering, more steadily than in Europe. The last quarter of 2009 registered phenomenal growth

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