Doing well, thank you

Two quarters have gone by since the Indian software leaders first reported the strong impact of rupee appreciation. It is therefore instructive to compare how they have performed, compared to the two quarters before the slowdown was reported. Average sequential growth in revenue is mostly higher, two percentage points up in the case of Infosys and Wipro and unchanged for TCS. In the case of net margins, TCS and Infosys are down by an average of one percentage point, Satyam by two and Wipro by two-and-a-half percentage points. But this fall has to be set against an average net margin of over 22 per cent. If this is the consequence of a 'challenging' environment, then many global industries would wish to be in such troubled waters. The point is that the top Indian software firms are well on their way to becoming global firms in all respects and that is the benchmark against which they have to be measured. TCS is set to become a $5-billion company and Wipro and Infosys will be in the $4 billion league. Infosys' net profit in the trailing 12 months has crossed $1 billion and the company has a cash chest of $2 billion! And these firms' year-on-year quarterly top line growth in dollar terms is around 40 per cent.

The challenge before the firms is therefore to stand tall in terms of growth in the global arena (at four and five billion dollars, they are still somewhat small in that league), while retaining the advantages of having a sourcing base in India. Perhaps the most optimistic statement recently made in terms of the longer-term health of the Indian software sector was by Infosys' HR director Monhandas Pai, that the recruitment pool for Indian IT has widened and the earlier fears of a talent shortfall were misplaced. Since the unique Indian capability is to deliver scalability with quality, there is nothing to fear for the foreseeable future. The software industry is likely to be able to deliver strong growth despite having grown stupendously in the last 15 years.

Within this framework, the individual companies present a differentiated picture. TCS seems to be the best placed in laying the foundations for a consistently bright future in terms of the three key criteria: reducing excessive dependence on the US, developing global delivery capability and developing the Indian market. Under 50 per cent of its revenue comes from the US, whereas the other two still rely on it for over 60 per cent of their revenue. TCS also sources just under 10 per cent of its sales from India, whereas Infosys garners just over 1 per cent. Wipro has a strong play in India, West Asia and the Asia-Pacific. Both TCS and Wipro are ahead of Infosys in terms of global (that is non-Indian) delivery. Infosys' strength, on the other hand, remains its best-in-class margins. It delivered great value to shareholders when the rupee was depreciating and the US economy was booming. Now that the rupee is appreciating, it has to come up with new tricks "" use some of the cash it is sitting on to acquire more global delivery capability.