Bracing against uncertainty

Currency uncertainty should now be added to the imponderables affecting the software industry, especially with the prospect of the rupee appreciating along with a floating yuan. Last quarter's results have already been affected by a small appreciation in the rupee's external value.

This makes it difficult to judge the industry's prospects on the basis of its immediate past performance. Leading Indian software companies have already assumed that the rupee will appreciate marginally each year over the next few years, and therefore plan to raise productivity and value addition so as to maintain margins.

Since Indian software has already moved beyond a straight price equation and has placed greater emphasis on quality, there is a fighting chance that it will be able to thrive in export markets even in a period of modest currency appreciation.

Productivity holds the key to success in view of another challenge""increasing costs, driven by rising compensation packages in a buoyant employment market. The ability to neutralise cost escalation through better price realisation is dependent on going up the value chain, and by undertaking more complex work.

Industry leaders have already notched up mild gains in price realisation as the advanced economies get to spend more on new technologies, but this is only the beginning. The main industry strategy is to become more consultancy- driven.

Infosys has announced that its consultancy business will break even this year, and TCS has informed that it will start revealing the numbers on its consultancy business from the next quarter, hinting at pleasant surprises. Wipro also sees consultancy, giving added traction to its business.

If we leave aside the matter of enhanced exchange rate uncertainty, the software companies' results for the last quarter indicate robustness. The disappointment seen in the stock market can only be attributed to excessive expectations.

This conclusion is inescapable because the numbers tell a positive tale. Two of the top three companies, TCS and Infosys, have posted very satisfactory growth in both revenue and profits, measured year-on-year as also sequentially from one quarter to the next. Wipro Technologies, the global software arm of Wipro, has seen its volume and bottom line remain flat sequentially.

But this is partly because it is changing its BPO business model. Once that is done, the company can be expected to be in step with the other two. Infosys remains the top dog in terms of margins and retains uniquely steady, but the surprise of the pack is TCS. It has grown both its top line and bottom line well. Listing seems to have done it a world of good and perhaps the depth of its capabilities has not yet been fully revealed.

While a fluctuating rupee can certainly affect the bottom line, business prospects for the industry remain unequivocally bright and the software giants should be able to manage the consequences of a mildly appreciating rupee. TCS and Infosys have announced $100-million deals and Wipro some large customer acquisitions.

Thus the industry remains upbeat in the face of increased uncertainty. The real challenge, of course, will be to sustain these growth rates as the software giants gain further in size, and head from near the $2-billion mark in annualised sales to the vicinity of $4 billion and more. At the present rate of growth, that challenge is not far away.