Business Standard

Software struggles on

Global economy not out of hospital yet

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Business Standard New Delhi

The surest sign that the global economy, particularly the developed countries, is far from getting back to normal lies in the results of India’s software leaders, TCS and Infosys, for the first quarter of the current financial year. It is not as if the storm of the last year is still there and the hatches remain battened down, but it is not calm seas and sunny sailing yet. The good news is that a certain amount of discretionary spending is back, the not-so-good news is that prices are either stable or under pressure, depending on who you are, and the bad news is that the inexorable need to recruit in order to deliver growth and volumes has resulted in higher attrition even as wage bills have gone up. Strong circumstantial evidence that the world of software is not back to where it used to be lies in the depressed residential real-estate market in Bangalore where life is entirely driven by IT industry prospects, unlike those in Mumbai and the national capital region, which have both bounced back.

 

The consolidated figures for the two firms indicate that both are having to fight hard to remain where they were, though the year-on-year figures tend to show TCS in better light. Both have recorded a sharp fall in margins by 2.9 percentage points on a quarter-on-quarter basis. Infosys’ net margin at 24 per cent is still over one percentage point ahead of TCS’, but this is a far cry from the large difference of several percentage points that existed around a year ago. In terms of top line growth, TCS was clearly ahead of Infosys last year (2009-10), at 8 per cent against 4.8 per cent of Infosys, though in the first quarter both have recorded a clear acceleration at around 14 per cent year-on-year. Infosys, in fact, looks forward to a better year overall than the first quarter and has accordingly hiked its top line guidance for the year. However, the guidance for margins has been revised upwards more modestly, indicating that on this front, it will be tough going in the foreseeable future.

The result of Infosys having virtually lost its margin leadership in the industry is reflected in the mood of utterances. Infosys CEO Kris Gopalakrishnan finds that the global environment for the software industry remains uncertain and challenging. On the other hand, TCS CEO N Chandrasekaran sees the reporting quarter as one of complete outperformance driven by strong demand across markets and industries. One reason why Infosys’ numbers may have lost their earlier special zing is the conservatism in its acquisitions, despite sitting on a hoard of cash. TCS, on the other hand, has over the years been aggressively and successfully chasing large orders in Europe. Significantly, it does not seem to be buoyed down by the troubled conditions in Europe, though we may not have heard the last on Europe’s unfolding saga of misery. Increasingly, revenue and margin stability in the future will be influenced by the presence of firms in the domestic market which is growing briskly. It is here again that both TCS and Wipro have an edge over Infosys.

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First Published: Jul 20 2010 | 12:13 AM IST

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