Software on a high

The first crop of second quarter results of software companies, which includes two of the top three players, TCS and Infosys, is as robust as could have been expected.

Coming after equally satisfactory first quarter results, the latest numbers indicate that the leading Indian software companies are on a healthy and stable growth path that is likely to be maintained in the medium term.

Healthy year-on-year growth has been matched by similar sequential growth. What is more, the growth has been accompanied by steady and, in individual cases like Infosys, improved margins. This has been made possible by several factors.

At the margin, it has been good luck; the rupee has depreciated somewhat. More importantly, the top line growth has been possible because of large deals bagged by Indian companies.

They have simultaneously been able to improve their offerings by adding new lines of services, which improve their attractiveness as long-term partners to whom clients can turn over larger parts of their IT work.

There are good reasons why the immediate outlook should be bullish. According to current reckoning, the rupee is likely to stay under pressure. This is likely to have a marginally positive impact on full-year results.

The second good omen is that prices commanded by the best Indian software companies have not only been stable for the last few quarters, they may improve as the year gets along. This is because of the steady trend in global IT spending and Indian firms' ability to grab a larger share of the outsourced cake.

In fact, going by the high prices at which some deals involving internet firms have recently taken place, like Yahoo's acquisition of a stake in the Chinese firm Alibaba.com and Ebay's acquisition of Skype, the world could be at the start of another tech bubble.

Better prices can also come from the pricing flexibility that is expected to flow from Indian firms consolidating their partnership position with major clients.

But bright as the short- or medium- term future is, there are challenges ahead, and solutions for some of them are not in the hands of the industry. The most important is the number and quality of Indian engineering graduates.

The Microsoft CTO has pointed out that India may be producing a large number of graduates but their proportion is small, given the size of India's population. Plus, the quality of what they learn is still not up to scratch. So a major task is to reorient the education system so as to impart more analytical capabilities, instead of just theoretical knowledge.

There is also a paucity of higher technical skills, indicated by the small number of IT PhDs that India turns out. If you do not keep going up the knowledge chain, you cannot go up the value chain.

Infosys has underlined the educational challenge by revealing that it is in discussion with the government to raise the supply of top engineers by several multiples.

The software companies also have to work closely with engineering schools to raise both quality and numbers. There is no reason why this challenge cannot be met, given the progress already made.