(The Hindu Business Line 13th May 2008)
For the quarter ended March 31, 2008, IT bellwether Infosys Technologies recently announced a consolidated net profit of Rs 4,659 crore a 20.82 per cent growth over the corresponding period a year ago. It has given a guidance (always conservative) of 16.3-18.3 per cent growth in earnings per share (EPS) to Rs 92.32-93.92 for the fiscal year ending March 2009.
This, despite a challenging economic environment in the US (where the main customer base of Infosys is located) as well as a downturn in its major vertical of financial services, is indeed commendable and displays the resilience of Infosys to weather the impending storm and continue to grow.
Even after the dotcom bust, Infosys had managed to keep its head above water.
The pressure on IT budgets of US clients have caused companies such as Infosys to move substantial work offshore and thus safeguard their operating margins.
They have also increased their footprint into Continental Europe and Asia-Pacific to diversify their customer base and thus, mitigate operational risk.
In addition, Indian IT companies are reacting to the above problems is by moving up the value chain toward consulting, product development and increasing the fixed price contracts they sign, to enable them take on more strategic end-to-end deals with clients.
The industry, which had grown fat and happy in the last few years based on the labour-arbitrage model, is beginning to re-invent itself. Wipro’s Applied Innovation Framework, for example, lays down a roadmap for systemic change to deliver sustainable business benefits. Strategy change
Change in strategy is being accompanied by changes in organisational structure. TCS, for example, plans to reorganise its global operations into integrated, customer-centric units to enhance customer focus, drive operational agility and address growth opportunities.
This new organisational structure will enable TCS to build a nimble organisation to capture new growth opportunities. Among the strategic initiatives being outlined are asset-leveraged solutions, platform-based BPOs and other new initiatives.
To alleviate the cost pressures, most Indian IT services companies are also looking abroad for lower-cost but talented employees and China and other cheaper Asian economies are now turning out to be hot talent spots.
One of the most contentious aspects of the Indian outsourcing story is exchange rate management. Managing exchange rate
As the US dollar continues to be the currency in which most of the revenues are derived (the US accounts for more than half of the Indian IT industry’s business), the fall in the dollar vis-À-vis the Indian rupee has eaten into the margins of Indian tech companies.
In India, after the RBI is done with its tightening cycle to counteract inflationary forces that have built up recently, we could expect cut in interest rates towards the latter half of 2008 as the prices of commodities fall (much of the rise is due to speculative elements which have exacerbated the demand-supply mismatch).
Even other Asian and Eurozone countries are expected to follow suit shortly and reduce their interest rates. This reduction of interest rates across the globe could cause the dollar to rise and this would benefit the tech sector.
IT major TCS recently cut its employees’ performance-linked variable pay component, reducing salaries by an average of 1.5 per cent for the year. It is feared this could be a virus which could spread to other Indian tech companies as well. TCS recently told its employees that its EVA (Economic Value Addition) had fallen.
Variable salary took a hit because it is linked to EVA, adopted to survive the intense competition that permeates this sector. The variable pay component of most TCS employees is about 30 per cent of the total compensation package.
I believe the fears of the underperformance of the Indian IT/ITES sector are unfounded. TCS reportedly has increased salaries of its employees up to 15 per cent this year in spite of reported cost-cutting measures and a cut in variable pay for two quarters. Overall revenue
In India, software and services exports are expected to touch the $40-billion mark in fiscal 2008, or more than 60 per cent of the overall revenue aggregate (including software exports, the domestic and BPO segments), according to the Strategic Review 2008 by Nasscom (National Association of Software and Service Companies) of India.
New areas such as engineering services outsourcing, remote infrastructure management and animation and gaming are being actively pursued.
With over $9-10 trillion of GDP ready to migrate from the west to the east, and the fact that India is just a small fragment of it, makes the future of the Indian IT sector look pretty bright. Demographic compulsions, driven by ageing populations and leading to manpower shortages in matured economies, will force the world to find newer ways to service itself.
India, with its significant pool of talent and healthy demographics, will have almost 47 million people in the working age group by 2020 and can play an important role in this domain. All that the IT-BPO industry needs to do is to convert this population into a job-ready, rightly-skilled and employable base of people.
Employees in the Indian tech sector are naturally worried about losing their jobs and their salary hikes being trimmed, but if they are made to understand the fact that in developed nations, the software industry suffers from a morose sense of identity which only perpetuates a negative image, thereby failing to inspire software as a compelling career prospect.
This results in a tremendous supply-demand mismatch and as long as they are motivated by the contributions that they can make to the world knowledge economy and that software can change the world, from the environment to healthcare, their careers are secured and should not be disturbed by short-term economic weaknesses in various parts of the world and currency fluctuations which are very erratic, transitory and sometimes favourable and sometimes not so.
They are in any way not a part of core competency of a knowledge-based firm which should keep re-inventing itself to provide more value-added consulting and technology services. The very fact that Infosys plans to add 25,000 employees this year speaks volumes of the confidence it is placing on the continued growth in this sector. Positive picture
Do positive earnings reports from Cognizant Technology Solutions and Infosys put a floor under the beleaguered Indian and quasi-Indian IT sector? I believe they do. The data points that are signalling a possible US recession are highly erratic and are changing violently from one period to another.
If you go back and look at the quarterly numbers from the big boys in the tech sector, pretty much each and every one met guidance (at worst) or beat (at best) during the last earnings season. This earnings season has exhibited a similar pattern. Besides, the Indian tech giants are beginning to look inward into India itself to enhance their turnover.
The impetus that will be provided by the technology upgradation plans announced in the Union Budget 2008 for the Indian Railways is immense. It is extremely likely that the sunset clause for tax exemption to STPI units would be extended. Not only this, the tech companies are beginning to evangelize further for the potential benefit of ICT in rural communities.
Without setting up brick-and-mortar operations in the relatively un-accessed over 6,00,000 villages in India, banks are ready to use smart card, biometric readers and other help of technology to reach the bottom of the pyramid. All this will be achieved at 80 per cent of the cost of setting up normal brick-and-mortar banking operations, making huge contributions to the growth of both banking and the Indian tech sector.
Also with the rapid globalisation, the offshore providers’ trade-offs on urgent resource allocation will need to be made among companies like Microsoft (based in the US), Philips (based in the Netherlands), Nokia (based in Sweden), Sony (headquartered in Japan) and Samsung out of Korea or Haier out of China.
This means that Chief Investment Officers of the US and the UK would now compete with these newly-turning giant companies for the best allocation of Indian resources, leading to above-market premium for star Indian software talent and the ability of companies to leverage on their skill-sets. Global footprint
Even in ITES, the story of how Jaswant became Jack, as India became the world’s back office is passé. How Jack became Jaswant as Indian firms increase their global footprint is the new orientation the world desires; and Indian firms, by opening new frontiers from South Africa to Australia, Japan to Mexico are making their presence felt in every area it is worth doing business in, and leaving a global footprint.
The theory of comparative advantage will benefit Indian companies and stand them in good stead in their quest to provide quality tech services at competitive cost and by not merely adopting but innovating industry’s global best practices.
Indian tech stocks have been beaten down over the last five quarters. Even after the rebound over the last few weeks, I believe all the above fundamentals are not being factored into the prices at which they are being currently quoted. Even otherwise, Indian tech stocks are good buys as contrarian bets. The Indian tech stocks should continue to extend their gains as positives get factored into them.(The author is a consultant for leading global institutional clients and multinational companies. Mandatory Disclosure: While he does not have any personal investments in tech stocks, it may be understood that he may have advised various clients from time to time on investing in tech stocks and other stocks listed in Indian and various world stock exchanges.)
For the quarter ended March 31, 2008, IT bellwether Infosys Technologies recently announced a consolidated net profit of Rs 4,659 crore a 20.82 per cent growth over the corresponding period a year ago. It has given a guidance (always conservative) of 16.3-18.3 per cent growth in earnings per share (EPS) to Rs 92.32-93.92 for the fiscal year ending March 2009.
This, despite a challenging economic environment in the US (where the main customer base of Infosys is located) as well as a downturn in its major vertical of financial services, is indeed commendable and displays the resilience of Infosys to weather the impending storm and continue to grow.
Even after the dotcom bust, Infosys had managed to keep its head above water.
The pressure on IT budgets of US clients have caused companies such as Infosys to move substantial work offshore and thus safeguard their operating margins.
They have also increased their footprint into Continental Europe and Asia-Pacific to diversify their customer base and thus, mitigate operational risk.
In addition, Indian IT companies are reacting to the above problems is by moving up the value chain toward consulting, product development and increasing the fixed price contracts they sign, to enable them take on more strategic end-to-end deals with clients.
The industry, which had grown fat and happy in the last few years based on the labour-arbitrage model, is beginning to re-invent itself. Wipro’s Applied Innovation Framework, for example, lays down a roadmap for systemic change to deliver sustainable business benefits. Strategy change
Change in strategy is being accompanied by changes in organisational structure. TCS, for example, plans to reorganise its global operations into integrated, customer-centric units to enhance customer focus, drive operational agility and address growth opportunities.
This new organisational structure will enable TCS to build a nimble organisation to capture new growth opportunities. Among the strategic initiatives being outlined are asset-leveraged solutions, platform-based BPOs and other new initiatives.
To alleviate the cost pressures, most Indian IT services companies are also looking abroad for lower-cost but talented employees and China and other cheaper Asian economies are now turning out to be hot talent spots.
One of the most contentious aspects of the Indian outsourcing story is exchange rate management. Managing exchange rate
As the US dollar continues to be the currency in which most of the revenues are derived (the US accounts for more than half of the Indian IT industry’s business), the fall in the dollar vis-À-vis the Indian rupee has eaten into the margins of Indian tech companies.
In India, after the RBI is done with its tightening cycle to counteract inflationary forces that have built up recently, we could expect cut in interest rates towards the latter half of 2008 as the prices of commodities fall (much of the rise is due to speculative elements which have exacerbated the demand-supply mismatch).
Even other Asian and Eurozone countries are expected to follow suit shortly and reduce their interest rates. This reduction of interest rates across the globe could cause the dollar to rise and this would benefit the tech sector.
IT major TCS recently cut its employees’ performance-linked variable pay component, reducing salaries by an average of 1.5 per cent for the year. It is feared this could be a virus which could spread to other Indian tech companies as well. TCS recently told its employees that its EVA (Economic Value Addition) had fallen.
Variable salary took a hit because it is linked to EVA, adopted to survive the intense competition that permeates this sector. The variable pay component of most TCS employees is about 30 per cent of the total compensation package.
I believe the fears of the underperformance of the Indian IT/ITES sector are unfounded. TCS reportedly has increased salaries of its employees up to 15 per cent this year in spite of reported cost-cutting measures and a cut in variable pay for two quarters. Overall revenue
In India, software and services exports are expected to touch the $40-billion mark in fiscal 2008, or more than 60 per cent of the overall revenue aggregate (including software exports, the domestic and BPO segments), according to the Strategic Review 2008 by Nasscom (National Association of Software and Service Companies) of India.
New areas such as engineering services outsourcing, remote infrastructure management and animation and gaming are being actively pursued.
With over $9-10 trillion of GDP ready to migrate from the west to the east, and the fact that India is just a small fragment of it, makes the future of the Indian IT sector look pretty bright. Demographic compulsions, driven by ageing populations and leading to manpower shortages in matured economies, will force the world to find newer ways to service itself.
India, with its significant pool of talent and healthy demographics, will have almost 47 million people in the working age group by 2020 and can play an important role in this domain. All that the IT-BPO industry needs to do is to convert this population into a job-ready, rightly-skilled and employable base of people.
Employees in the Indian tech sector are naturally worried about losing their jobs and their salary hikes being trimmed, but if they are made to understand the fact that in developed nations, the software industry suffers from a morose sense of identity which only perpetuates a negative image, thereby failing to inspire software as a compelling career prospect.
This results in a tremendous supply-demand mismatch and as long as they are motivated by the contributions that they can make to the world knowledge economy and that software can change the world, from the environment to healthcare, their careers are secured and should not be disturbed by short-term economic weaknesses in various parts of the world and currency fluctuations which are very erratic, transitory and sometimes favourable and sometimes not so.
They are in any way not a part of core competency of a knowledge-based firm which should keep re-inventing itself to provide more value-added consulting and technology services. The very fact that Infosys plans to add 25,000 employees this year speaks volumes of the confidence it is placing on the continued growth in this sector. Positive picture
Do positive earnings reports from Cognizant Technology Solutions and Infosys put a floor under the beleaguered Indian and quasi-Indian IT sector? I believe they do. The data points that are signalling a possible US recession are highly erratic and are changing violently from one period to another.
If you go back and look at the quarterly numbers from the big boys in the tech sector, pretty much each and every one met guidance (at worst) or beat (at best) during the last earnings season. This earnings season has exhibited a similar pattern. Besides, the Indian tech giants are beginning to look inward into India itself to enhance their turnover.
The impetus that will be provided by the technology upgradation plans announced in the Union Budget 2008 for the Indian Railways is immense. It is extremely likely that the sunset clause for tax exemption to STPI units would be extended. Not only this, the tech companies are beginning to evangelize further for the potential benefit of ICT in rural communities.
Without setting up brick-and-mortar operations in the relatively un-accessed over 6,00,000 villages in India, banks are ready to use smart card, biometric readers and other help of technology to reach the bottom of the pyramid. All this will be achieved at 80 per cent of the cost of setting up normal brick-and-mortar banking operations, making huge contributions to the growth of both banking and the Indian tech sector.
Also with the rapid globalisation, the offshore providers’ trade-offs on urgent resource allocation will need to be made among companies like Microsoft (based in the US), Philips (based in the Netherlands), Nokia (based in Sweden), Sony (headquartered in Japan) and Samsung out of Korea or Haier out of China.
This means that Chief Investment Officers of the US and the UK would now compete with these newly-turning giant companies for the best allocation of Indian resources, leading to above-market premium for star Indian software talent and the ability of companies to leverage on their skill-sets. Global footprint
Even in ITES, the story of how Jaswant became Jack, as India became the world’s back office is passé. How Jack became Jaswant as Indian firms increase their global footprint is the new orientation the world desires; and Indian firms, by opening new frontiers from South Africa to Australia, Japan to Mexico are making their presence felt in every area it is worth doing business in, and leaving a global footprint.
The theory of comparative advantage will benefit Indian companies and stand them in good stead in their quest to provide quality tech services at competitive cost and by not merely adopting but innovating industry’s global best practices.
Indian tech stocks have been beaten down over the last five quarters. Even after the rebound over the last few weeks, I believe all the above fundamentals are not being factored into the prices at which they are being currently quoted. Even otherwise, Indian tech stocks are good buys as contrarian bets. The Indian tech stocks should continue to extend their gains as positives get factored into them.(The author is a consultant for leading global institutional clients and multinational companies. Mandatory Disclosure: While he does not have any personal investments in tech stocks, it may be understood that he may have advised various clients from time to time on investing in tech stocks and other stocks listed in Indian and various world stock exchanges.)
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