It's back to boom time for Indian IT

Here are some figures for anyone who has doubted the future of the Indian software industry.

In calendar year 2003 Cognizant has upped its revenue guidances for the year five times -- each time by hefty amounts.

It started by predicting revenues of $229 million and that climbed to between $300 million and $305 million. Cognizant didn't stop there. It revised its guidances three more times: first to $330 million, then to $354 million and finally to $365 million.

One thing's for sure. Cognizant is about to post terrific returns. The company believes that revenue growth will climb by 60 per cent for 2003. That means it's about to post the highest revenue growth amongst India's top five software services players.

Says Lakshmi Narayanan, president and chief operating officer, Cognizant: "The reasons for such stupendous growth are clear. The IT industry is transitioning from the early stages of a global mega trend in offshore outsourcing to a mainstream mode where offshore outsourcing is seen as the highest priority by Fortune 500 and blue chip companies in the US and Europe."

Cognizant isn't the only company that has the champagne ready. In Delhi Vijay K Thadani is looking pleased.

For the chief executive officer of NIIT, business seems to be booming after about two years of instability.

The company has recorded a 347 per cent increase in net profit to Rs 5.9 crore (Rs 59 million) in the fourth quarter of 2003 against a Rs 1.31 crore (Rs 13.1 million) net profit last year.

These aren't isolated cases. After two years of cost-cutting and living with trimmed margins, the Indian software industry is once again on a roll. Most companies have announced improved business and have revised projections upwards.

What's more, there's extreme bullishness about the future. Every Indian chief executive says two clear trends are emerging.

Companies that have experienced offshore outsourcing are moving much more and more complex work offshore and those that haven't tasted offshoring are taking to it vigorously.

"The companies are seeing an improvement in business. The US companies are realising the importance of outsourcing. We are seeing Indian companies managing cost and execution more effectively. Besides, they have learnt to work in the tough business environment," says Sunil Mehta, vice president, National Association of Software and Service Companies.

Nasscom is not revising its export projections yet but it may if current trends continue into the next quarter.

Move across to Hyderabad where the same bullish mood is visible. Satyam Computers reckons this has been the "best quarter in the last 10 quarters".

In addition, growth was spread across all major verticals as well as various technology segments.

"Besides an evident demand growth for offshore outsourcing, this has been possible because of the increased investments made by Satyam in strengthening relationship management," says a company spokesperson.

What are the software companies doing as the boom-boom era returns? Even the smaller companies are investing heavily for the future.

Take Noida-based Xansa, which offers both software services and BPO. Xansa is adding about 2,500 people this year and is investing about Rs 160 crore (Rs 1.6 billion) in the first phase of growth.

"There is substantial improvement in the business scenario. We see more business coming to India. I think this is the general business trend in software outsourcing," says Saurabh Srivastava, executive chairman, Xansa.

The figures are even more impressive at Cognizant, which grew by 2,200 professionals in calendar 2002 from 3,900 to 6,100. It expects to end calendar year 2003 with 9,000 professionals.

Besides, Cognizant has invested close to Rs 200 crore (Rs 2 billion) in the last two years in India to set up technocomplexes in Pune, Kolkata, and Chennai. And NIIT is also adding capacity in Delhi, Kolkata and Bangalore to support its growth.

Satyam too is looking forward to big growth. In the first six months it recruited close to 1,500 associates and is looking at adding another 1,500 associates in the second half. Besides, Satyam is planning an increased capital expenditure.

In the first six months the company had capex of Rs 30 crore (Rs 300 million). It's likely to spend around Rs 80 crore (Rs 800 million) to Rs100 crore (Rs 1 billion) this year.

NIIT is busy undertaking business restructuring exercises to make the most of the recovery and to ensure the right strategy for growth. The company is spinning off its software solutions business into a separate company.

Says NIIT chairman Rajendra S Pawar, "The proposed restructuring will accelerate growth in businesses and allow us to pursue growth opportunities more aggressively."

The fact is that NIIT is looking better than it has for quite some time. It has a fresh order intake of $42.3 million and the pending order book as on September 30, 2003 stands at $125.7 million.

In the past year, NIIT's strategy of pursuing inorganic growth, a strong focus on identified verticals and service practices, and the entry into the BPO space has resulted in a healthy 26 per cent revenue growth, matching the software industry growth levels.

For software major Wipro too, there has been growth in several areas. It's doing well in package implementation service, the technology infrastructure service, business process outsourcing and research and development business. There has also been a robust addition of new customers.

Similarly for the country's number two software exporter Infosys, volume growth continued to be strong and prices have stabilised.

"We have had double digit volume growth on the offshore side. We are seeing prices stabilising. In fact, our revenue productivity on the blended basis this quarter is the same as last quarter," says Nandan M Nilekani, CEO, president and managing director, Infosys Technologies.

The biggest relief for the Indian companies has been that the huge pressure of billing rates has eased considerably.

"Billing rates continue to move in a narrow range for like-on-like services (excluding the impact of the service mix). The pressure of the appreciating rupee is offset to an extent by improving operational efficiencies like utilisation and increasing the offshore content as well as financial efficiencies," says Anjan Sur, manager-treasury, Wipro.

Nevertheless, many companies are still being extremely careful about costs. Satyam, for example, has adopted a strategy, which ensures positive momentum on prices as compared to previous quarters.

"We are looking at cost rationalisation, improved productivity of fixed bid projects and increasing the offshore component of our business as a way to manage margins," the company spokesperson said.

The fact is that companies around the world are getting over their fears of outsourcing.

"We have added clients and we have grown with existing clients. The clients are giving us feedback that offshore outsourcing is mainstream. They would like to grow the business with Infosys, with India, using the offshore model. We are increasing our capital expenditure on our global infrastructure," says Infosys' Nilekani.

Most companies believe the positive signs are not short term and there is a long-term business stability.

However, the appreciating rupee is a matter of concern. "We continue to hedge our forex exposure, but the appreciating rupee may impact margins," says Nilekani.

According to Nasscom's Mehta, the main concern for the companies now is the rise in rupee value, ability to manage growth and competition.

"Rupee appreciation is certainly a matter of concern. For every percentage point of rupee appreciation, there is a certain percentage dip in margins. The companies need to look at alternate currencies to hedge the risk," says Mehta.

There are other threats on the horizon. Global third party software vendors like IBM, Accenture and EDS setting up their own shops in India.

"More than companies setting up their own centres, the third party vendors setting up shops is the bigger threat for the Indian companies. Now the foreign companies can offer services at Indian prices.

Says Mehta "The Indian companies now need to find another differentiator."

Additional reporting: Sanjay K Pillai, Raghavendra Rao and Vasanth Kumar