In the stock markets, candour often doesn't pay. Or so Infosys found out when its stock was soundly thrashed after it projected a 8-10 per cent revenue growth in the current fiscal. This has also sparked a heated debate on whether the honeymoon period is over for the Indian software sector. While some of Infosys' problems are company-specific, the facts suggest that the sector may be in for challenging times ahead.
It is a challenge only in the sense that the industry may not be able to sustain the phenomenon of high profit growth that it has been accustomed to all these days. The numbers reported by top tier IT players — profit growth of 20 per cent plus and net profit margins of 20 per cent-plus — are hardly suggestive of a business in decline. Few Indian companies, apart from those operating in natural resources space, can boast of such profitability. But having said that, what has changed for Indian software companies is that many of them are reaching a critical size, at which it becomes increasingly difficult to sustain high rates of growth on what is already a very high base. Competition, too, has intensified. Business verticals such as banking and financial services, the mainstay of growth for many software majors, are now crowded, with top tier firms such as Infosys, Wipro, HCL Tech and TCS jostling for space with mid-tier firms. Moreover, multinationals such as Accenture and IBM are aggressively expanding their India headcount. Finally, with global financial services just limping back to health and manufacturing still sluggish, Indian software firms, even top tier ones, are having to cope with much more uncertainty about winning new deals than before. With their clients holding all the cards, contract periods have shortened, deal sizes have shrunk and pricing is being based on outcome, rather than man-hours. Therefore, while Indian software firms may still manage healthy growth rates, these may have to come at the cost of profit margins. It is in this scenario that the market has taken rather a bleak view of Infosys' projection that it will manage a revenue growth of 8-10 per cent in the current fiscal.
Having said that, the market may well be pardoned for singling out Infosys for some harsh treatment. A churn in its top management team, uncertainties in the business plans of its key financial services clients, a large cash pile and deliberate choices made by the Infosys management to retain margins at the cost of growth, have marked it out from other large players in the industry. On all of these counts, there is a clear divide in the performance of the top tier IT firms. While Infosys and Wipro seem to be focusing on margins, those such as Cognizant and HCL Technologies have delivered healthy growth by aggressively chasing down deals in regions such as Europe. TCS, taking the middle path, has managed strong growth rates too, despite stagnating global IT spends. The bottom line in all this is that the Indian software sector, much like other sectors, will now have to cope with much more volatility than it has been used to.