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More software firms to feel the heat of US sluggishness in Q4

Anusha Subramanian

The fourth quarter may see more casualties among local software firms, a result of US economic slowdown. According to analysts, the profit warning from education and software services provider, NIIT, is being followed by worrying signs from other software companies as well.

As the fiscal draws to a close in March, nearly every software firm, including the top ten, are expected to show some cracks in the dream innings they posted so far.

Infosys Technologies is susceptible because its billing rates are higher than most of its peers. The company's onsite billing rates increased 17 per cent to $65 from $55 in the second quarter of 2001. This was primarily because of a sharp increase in onsite projects, especially in the e-commerce arena.

Although onsite rates increased a further 2 per cent in the 2001 third quarter, analysts are of opinion that there is a possibility that this may actually decline over the next few quarters. According to one research agency, the estimated decline could be to the tune of $53 by the fourth quarter of 2002.

In other words, Infosys is more vulnerable to downward pressure on billing rates. So far, the firm has maintained that it is not re-negotiating rates with any clients. However, if the US economy continues downhill, it may be forced to decide between lowering its billing rates and not taking on some projects.

Wipro, for instance, decided not to renew its contract with GE, one of its largest customers, because the two could not come to terms on billing rates. So far, the company's business outlook is unchanged despite the US slowdown and an increasing number of profit warnings by technology companies.

However, a research analyst with a leading investment bank said that Wipro is likely to see some impact in the current quarter. "Among the big companies Wipro and SSI may show some impact. Wipro because of its research and development and SSI because it is an early stage software company," he said.

SSI, like NIIT, has revenue from both education and software services. For the quarter ended December 2000, about 58 per cent of revenues came from training and education. The rest came from software services. In software services, the top five clients contributed 38 per cent to the revenue with four clients contributing over 5 per cent each.

Analysts are of the view that the impact of the slowdown on companies could be in terms of actual numbers, operating parameters like billing rates and customer acquisition, or future growth targets.

For the quarter ending March 2001, one of the three will definitely occur. A senior analyst from a leading research firm who has been evaluating the impact of the slowdown on Rs 1 billion-plus software companies, said: "Sobering of growth expectations will be explicit."

On the smaller companies, the impact could be as severe if not worse. What is in favour of the biggies like Infosys and Wipro is that they are established players with a global client base and stronger fundamentals. They have limited exposure to any one client or technology and are therefore better placed to tackle the slowdown.

But on the other hand, the medium-sized and small companies - especially those doing low-end projects - are expected to be hit directly by the slowdown. Those with offshore development capabilities will be impacted to a lesser extent. "ODCs (offshore development centres) will save companies," agrees a senior software analyst.

Offshoring may end up being a mainstream delivery model. Globally, it is set to deliver strong growth of over 50 per cent for the next three to four years, and India will continue to be the biggest beneficiary of this phenomenon. Indian IT companies with scaleable offshore capacities and strong client references will, be best positioned to grow their revenues and billing rates on a sustainable basis.

Analysts predict that 25-55 per cent of the companies (with Rs 500 million or higher revenues) will be hurt by the US slowdown in the current quarter. It is understood that there are at least three big companies that are going to be impacted by the slowdown this quarter.

E-business projects are at a greater risk as are expensive onsite projects. Routine maintenance projects are least risky because companies cannot do without them.

"Companies which are at a risk are those which play dotcoms and all those companies which are into body shopping through other consultancy firms etc," said Ganesh Natrajan, vice-chairman and managing director of Zensar Technologies.

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