While software industry leaders are claiming that the economic environment for them continues to be challenging, the numbers indicate a more positive state of affairs and a possible return to business as usual. The dark year of 2009-10 is behind them. This is particularly so for the top two. Tata Consultancy Services (TCS) has steadily improved top line growth for the third successive quarter now and chalked up an impressive 24.9 per cent growth year-on-year for the September quarter. Same is the case with Infosys Technologies, which has recorded a 24.4 per cent growth. Both have in the process gone back to the rate of growth they had achieved in the fourth quarter of 2008-09, that is six quarters ago. On the margin front the story is varied but instructive. Even through the slowdown, TCS had been improving its margins and its net margin now stands at an impressive 23.3 per cent, which is under 2 percentage points behind that of the margin leader Infosys. As for the latter, it never lost track of margins even during the darkest period when growth was negligible or negative. At the current level, margins have not returned to the best figures of 27 per cent plus, indicating that a tough struggle is still ahead. Wipro, which has non-software businesses ranging from soaps to lighting, has also maintained a steady level of net margins over successive quarters despite top line volatility. In keeping with the overall mood, TCS CEO N Chandrasekaran has struck the most positive note about the recovery of global demand in the period ahead.
It is important to note that the steady improvement in the performance of leading Indian software companies comes at a time when recovery in the advanced economies, where most of their clients are located, remains weak. It is also important that the leaders are in a separate class compared to the rest of the software industry whose performance is in keeping with the halting economic recovery in developed economies. This indicates that in fair weather or foul, the leaders are likely to do good business because, as Infosys CEO S Gopalakrishnan says, investment in information technology (IT) will have to be made in building tomorrow’s businesses (no matter how negative the current scenario at any given moment may be) and his firm is part of that initiative. Thus, as long as businesses keep reinventing themselves, Indian IT leaders will be partnering them. This substantially de-risks the latter’s business from the worst vagaries of business cycles. The biggest risk to these firms remains the anti-offshoring sentiment in the US, the main client base of the IT leaders and it is significant that despite this sentiment being at a pre-election peak, business has not been adversely impacted. However, the big IT firms seem to have learnt a key lesson and have announced plans to significantly raise the level of local hiring. As this process continues and the share of domestic Indian business increases, margins are likely to come under pressure. But the firmness of the current recovery indicates that they will still remain extremely healthy in comparison to any other mature industry.
