While the rupee depreciation has helped the firms improve their sales figures, their bottom line is under pressure and all three have recorded a decline in net margins, which have been affected by hiring costs going up even as pricing has come under pressure. Several major US banks are renegotiating contracts, and with the US financial sector likely to remain in the doldrums for some time, pricing prospects are not very bright. The software majors have always argued that when their clients come under pressure and have to cut costs, they end up outsourcing more, thus helping the companies that deliver services offshore. But the balance sheets of US financial firms are shrinking and even if more work is offshored to low-cost centres, prices will be cut to the bone. Thus the period ahead will be a challenging one.
The positive side to the story is that the Indian software leaders have learnt to live through challenging periods and come out on top. Parallels are being drawn with the 2002-03 period in the wake of the technology and telecom bubbles bursting, compounded by the adverse consequences of 9/11. There is no dispute that the top players, who are now $5 billion firms, are infinitely more robust and better equipped to fight the downturn than they were some years ago. In fact the big three have been growing faster than the rest of the Indian industry and their share of the dollar offshored to India is likely to increase. This is bad news for the smaller firms, except those in high-skill areas like engineering design and knowledge process outsourcing. Also, the entire software industry, and not just the leaders, is likely to be helped by another development. The slowdown that the Indian economy faces will reduce the speed of manpower cost increases, and this after all is the most important cost component for the software industry.
