Posts Tagged ‘Software’

Can the Good Times Continue for India’s Software and Outsourcing Companies?

April 15th, 2014

While India’s leading software companies are set to announce impressive earnings growth this week thanks to a strong dollar, analysts and investors say they will be listening for clues to whether the good times can continue if the rupee rebounds.outsourcing51

India’s top information technology software and outsourcing companies, Tata Consultancy Services Ltd., Infosys Ltd. and Wipro Ltd., are all scheduled this week to announce their earnings for the quarter ended March 31. As it is the last quarter of the fiscal year some are also expected to give more guidance on what will they think might happen this fiscal year.

While the industry has been expanding healthily–the year just ended will be the best in three years in terms of growth according to some estimates—much of the recent progress can be attributed to the rupee’s decline against the dollar. A weak rupee makes India companies more competitive and it inflates the rupee value of the billions of dollars they make abroad.

For India’s top outsourcers to keep the pace of growth high, they need to diversify into new and higher-margin businesses as they to continue to find more customers in the U.S. and Europe as those economies recover.

“The economic environment in major markets has improved,” said Shashi Bhusan, senior analyst with Mumbai-based brokerage Prabhudas Lilladher. “There is no doubt that recovery in the U.S. is strong and steady.”

The days of easy growth may be coming to an end, some analysts warn, as the rupee gathers strength against the dollar. The rupee rose around 4% against the dollar in the last two months and is expected to rise further.

Still most analysts are optimistic that even without the currency crutch, India’s software industry can clock another strong year. While some of the leaders of the sector may project single digit expansion for the year, the broader industry is expected to grow its dollar revenues as much as 15% in the fiscal year just started this month.

Tata Consultancy has already said that this fiscal year is looking better than last year though it has not projected what kind of growth that will mean. Analysts expect Infosys this week to give a conservative forecast for dollar revenue growth of less than 10% for the fiscal year. Wipro, which only gives quarterly forecasts, may be even more cautious and project 3% to 5% dollar revenue growth for this quarter.

Bangalore-based Infosys is first up to announce its earnings on Tuesday. On average six analysts polled by The Wall Street Journal predicted the company’s net profit grew 20% in the three months ended March 31, from a year earlier to 28.63 billion rupees ($476 million), while its revenue increased 24% to 129.38 billion rupees.

Most analysts predict Infosys to announce a weak revenue growth forecast this fiscal year as it has failed to meet its own targets for the past two years.

“Uncertainty about Infosys’ guidance and commentary is becoming as big an issue as the underperformance of the company itself,” Mumbai-based brokerage IIFL Capital said in a note.

Tata Consultancy reports earnings on Wednesday. Analysts on average said its net profits probably grew to 52.56 billion rupees last quarter, a 46% jump from a year earlier, as its revenues increased 32% to 216.65 billion rupees.  Tata has outperformed its peers, analysts said, because it has been better than others at keeping costs down.

Wipro Ltd. reports on Thursday, and is expected to announce profits of 21.34 billion rupees, a year-on-year growth of 23.4%. Revenue likely grew 22% to 117 billion rupees.


“Outsourcing” software does not mean “producing” software

March 26th, 2014

Director of the HCM City Information and Communication Department Le Thai Hy complained at a meeting with the leaders of the Ministry of Information and Communication (MIC) in mid March that it is unfair not to offer tax incentives to software outsourcing firms.Outsourcing24

A software firm in HCM City, which employs 450 workers, 85 percent of whom are engineers, has been asked by the HCM City Taxation Agency to pay VND3 billion in corporate tax arrears.

The firm specializes in making software products for the US market, undertaking all the phases of the production process, from designing, processing, coding and delivering. This means that the firm makes products and delivers finished products to the US partners.

However, in the contracts with the US partners, the works were described as the software outsourcing. As a result, the firm has been requested to pay VND3 billion in corporate tax arrears.

The HCM City Taxation Agency, which made the request, said that the software outsourcing does not mean software production, and that software outsourcing is not the subject to enjoy the corporate income tax incentives.

The firm argued that the works it did, by nature, was the software production, refusing to amend the contracts signed with the US partners as suggested to be eligible for the tax incentives.

The case was intervened by the HCM City People’s Committee, which certified that the firm really “produced software,” because it did the designing, processing, coding and other necessary works of the software production chain.

In early February, the HCM City Taxation Agency replied that the firm could meet the requirements to be able to enjoy the tax incentives. However, it did not clarify if the decision on VND3 billion tax arrears collection is retroactive.

To date, the “suspended sentence” is still hanging over the firm, while the managers of the company do not know if it can enjoy the tax incentives for the next contracts, which show that the firm does the “outsourcing.”

Hy went on to say that the taxation body should create most favorable conditions for enterprises to develop rather than trying to collect tax as much as possible.
Who to blame?

The problem, according to the Director of the MIC’s Information Technology Department Nguyen Trong Duong, lies in the Prime Minister’s Decision No. 10 which was released 10 years ago.

The decision showed the list of the IT fields subject to tax incentives. However, since the legal document was released a long time ago, it has become out of date with a lot of branches having not updated in the list.

Duong said MIC is drafting a circular to clarify the tax impositions on software firms.

Under the draft circular, there are six steps of a software production process, including 1) users’ requirement defining, 2) design analyzing 3) programming, 4) testing 5) completing and packaging 6) Installation, warranty, maintenance.

One just needs to take one of the four core steps, from the design analyzing to completing & packaging will be recognized as software production firm.


Ashghal Awards Contract for Causeway’s CATO Software

February 3rd, 2014

Ashghal was established in 2004 to be responsible for the planning, design, procurement, construction, delivery, and asset management of all infrastructure projects and public buildings in Qatar. Adhering to the Qatar National Vision 2030, the Authority contributes to the economic and social development of the State of Qatar, with projects valued at over QR 100 billion to be delivered within the next five to seven years.

Causeway’s Cost and Programme Management software (CATO) will enable Ashghal’s internal consultants to create, monitor and track a comprehensive internal rates database based on information supplied by consultants and contractors for work issued by the authority. The automated measurement software will allow the organisation to quantify measurements, rates and check estimates supplied over the coming years.


Abdulsamd Al-makei, Manager of Engineering Business Support at Ashghal commented: “We operate a powerful model of strategic outsourcing and partnership with world leading establishments and the Causeway solution was chosen after thorough assessment of the products and a rigorous tender process. We are looking forward to working with Causeway in implementing the software and using it to maximum benefit.”

Causeway Executive Vice President Paul Madeira added: “Ashghal’s contribution to the State’s huge infrastructure development is pivotal to the future of Qatar. We are delighted to have been selected by their Tender Committee and Head of Contracts to support their mission.”


Indian IT sees new ends and beginnings

January 7th, 2014

There was a galaxy of corporate leaders last Friday at a farewell ceremony for Som Mittal, president of the National Association of Software and Service Companies (Nasscom), who makes way for R Chandrashekhar, former IT and telecom secretary.outsourcing29

And everytime a new president takes over, it seems there are new problems — and new opportunities — as it seems this new year.

I used to know Nasscom two decades ago as a one-man show in T-shirt and jeans, when the late Dewang Mehta walked the newsrooms trying to sell the idea that India would become a big software exporter. It was then less than 1/200th the size of the industry that now grosses more than $100 billion (R 630,000 crore) in revenue and directly employs 3 million people.

Mehta died in 2001 of a sudden heart attack at the young age of 37 in Australia, possibly of stress trying to sell the idea that is now an obvious truth: that India can be the world’s hub for IT and back-office services. That very year, India’s IT industry was rocked by a triple whammy. The Internet “dotcom” bust and an accompanying telecom meltdown followed by 9/11 attacks hit the industry hard. However,  months later, Indian companies latched on to business process outsourcing (BPO). Cost-cutting in the West now spelt new opportunities for India.

Dr. Kiran Karnik now took over as Nasscom president as BPO boomed liked hell, but his problems were different. He had to prepare the industry for education and other measures to make it brave an impending shortage of skilled workers as India’s abundant knowledge workers seemed to be a smaller pool than earlier thought, given the explosion in demand as multinationals like IBM and Accenture expanded their footprint in India.

Som Mittal took over from him in 2008, only to see the industry plunge into a new crisis when the Wall Street collapse hit hard the biggest markets of US and Europe and along with it the juiciest customers of the financial services industry. But Mittal’s opportunities lay in the emergence of startups and mobile telephony. Nasscom, with help from companies like Google, is nurturing 10,000 startups, indicating that the former “cheap code” nation can now shape innovative giants.

Chandrashekhar steps in for new opportunities spelt by the acronym SMAC – social media, analytics and cloud computing — while the US economy has turned robust again. But his problems seem to be emerging in the realm of cyber security and privacy, as a huge network of global computers give rise to new problems in politics, diplomacy and culture. There is never a dull moment at Nasscom!


Worldwide IT Spending to Reach $3.8 Trillion in 2014: Gartner

January 7th, 2014

Worldwide IT spending is projected to total $3.8 trillion in 2014, a 3.1 percent increase from 2013 spending of $3.7 trillion, according to the latest forecast by Gartner, Inc. In 2013, the market experienced flat growth, growing 0.4 percent year over year.outsourcing25

Spending on devices (including PCs, ultramobiles, mobile phones and tablets) contracted 1.2 percent in 2013, but it will grow 4.3 percent in 2014. Gartner analysts said convergence of the PC, ultramobiles (including tablets) and mobile phone segments, as well as erosion of margins, will take place as differentiation will soon be based primarily on price instead of devices’ orientation to specific tasks.

Enterprise software spending growth continues to be the strongest throughout the forecast period. The 2014 annual growth rate is expected to grow 6.8 percent. Customer relationship management and supply chain management (SCM) experienced a period of strong growth.

“Investment is coming from exploiting analytics to make B2C processes more efficient and improve customer marketing efforts. Investment will also be aligned to B2B analytics, particularly in the SCM space, where annual spending is expected to grow 10.6 percent in 2014,” said Richard Gordon, managing vice president at Gartner. “The focus is on enhancing the customer experience throughout the presales, sales and post sales processes.”

The Gartner Worldwide IT Spending Forecast is the leading indicator of major technology trends across the hardware, software, IT services and telecom markets. For more than a decade, global IT and business executives have been using these highly anticipated quarterly reports to recognize market opportunities and challenges, and base their critical business decisions on proven methodologies rather than guesswork.

Last quarter, Gartner’s forecast for 2014 IT spending growth in U.S. dollars was 3.6 percent, a 0.5 percentage points higher than the current forecast.

“A downward revision of the 2014 forecast growth in spending for telecom services, a segment that accounts for more than 40 percent of total IT spending, from 1.9 percent to 1.2 percent is the main reason behind this overall IT spending growth reduction,” said Mr. Gordon. “A number of factors are involved, including the faster-than-expected growth of wireless-only households, declining voice rates in China and a more frugal usage pattern among European customers. The latter coincides in Western Europe with a breakout of fierce price competition among communications service providers to retain customers and attract new ones”.

The data center systems spending growth outlook for 2014 has been cut from 2.9 percent in our previous forecast to 2.6 percent. This is mainly due to a reduction in the forecast for external controller-based storage and enterprise communications applications. These segments represent 32 percent of total data center system end-user spending.

Gartner has slightly revised downward the IT services compound annual growth rate between 2012 and 2017. The largest contributor to this revision comes from reductions in IT outsourcing specifically, in colocation, hosting and data center outsourcing growth rates. “We are seeing CIOs increasingly reconsidering data center build-out and instead planning faster-than-expected moves to cloud computing. Despite these small reductions, we continue to anticipate consistent four to five percent annual growth through 2017,” said Mr. Gordon.


IT stocks defy gravity even when rupee is rising

September 12th, 2013

The rupee’s appreciation, generally good for the market as a whole, is not favourable for software companies that earn a large chunk of revenue from exports. But, despite its steep 7% rise against the dollar in the last six trading sessions, IT stocks have not fallen; in fact, the BSE IT index has risen by a percentage point.Outsourcing19

Analysts attribute this sterling performance to steady US growth and Indian vendors’ abilities to penetrate the European market. TCSBSE -1.28 % and other frontline stocks rise rapidly when the rupee falls, but do not fall much when it bounces back, making them stock market darlings in a volatile market.

“Recent quarterly results, key US economic indicators make us believe a sustained uptick in IT outsourcing spend over the next 12-18 months is underway. This coupled with a significant cushion from depreciation in the rupee will keep the win ratios for Indian IT stocks favourable,” said a note by Macquarie.

The wisdom in Dalal Street is that IT stocks are inversely correlated to the rupee – they tend to fall when the rupee appreciates and vice versa. But, for the past few weeks, this logic seems to have worked in favour of IT stocks – when the rupee rose, IT stocks were either flat or fell just a wee bit, but when the rupee fell, IT stocks rallied sharply.

IT services sector has been the best performer in the Indian stock market year to date and has outperformed other defensive sectors such as FMCG and pharmaceuticals. While the BSE IT index has gained over 40% so far this year, BSE FMCG and BSE Healthcare have risen 13% and 15%, respectively.

TCS, which has risen 57% so far this year, is the second-most valuable IT services company in the world after IBM. With a $61-billion market cap, TCS has a big lead over Accenture ($50.5 billion) and HP ($43 billion). It also contributes a major chunk to the total market cap of the entire Tata Group — almost 60%.

The other Indian IT services firms such as InfosysBSE -1.14 % and HCL TechnologiesBSE -0.59 % gained 71% and 35% this year. “While the IT sector has performed YTD and valuations have inched up to higherthan historical average, we believe they are not in the exorbitant zone and can still sustain as demand signals show improvement, risks recede and market set-up remains favourable with benign currency, limited supply-side constraints and relative attractiveness of export-oriented IT sector versus a worsening domestic macro backdrop,” said Ashwin Mehta, analyst at Nomura.

“We expect current economic structure to imply low risk of a recession in the key markets of Indian IT companies over the next 12-24 months.”

TCS trades at around 27 times its trailing 12-months net profit, Accenture trades at around 16 times, while IBM is at 14 times earnings. The data from FY08-13 points to Indian IT companies utilising the benefit of the depreciated currency to invest in the business. The fall in the rupee will ensure this pricing intensity does not translate into narrowing of margins.

The rupee’s 63 to the dollar levels won’t affect IT stocks heavily but if there’s further appreciation to 60, then investors may start booking profits, analysts said. “IT companies are riding on the sharp recovery in the US economy and rupee depreciation,” said Sonam Udasi, head of research at IDBIBSE 0.84 % Capital. “However, if the rupee strengthens below 60, then the negative sentiments will prevail and investors could start selling these stocks.”


Falling rupee brings profits, challenges for small IT exporters

September 3rd, 2013

The continuous and free fall of the rupee against the US dollar has set the cash registers of India’s small IT software exporters jingling, but on the flip side, this may also bring a plethora of challenges.

International clients are trying to persuade small software exporters to renegotiate contracts, expecting that the rupee will slide further.

According to Pratap Aggarwal, managing director and CEO of IDS InfoTech Limited, the expectations of overseas clients are increasing. “Cheap Indian software was a demand driver earlier, but now clients are looking for innovative skill-sets. An expertise in a technology or multiple technologies is now the pre-requisite to attract overseas buyers,” he said.

Noting that Indian small and medium-sized software exporters need to change their business models and core competencies, Manish Bahl, vice-president and country manager, Forrester India (the Indian arm of global advisory firm Forrester Research Inc), said that the difficult economic landscape has forced Indian firms to look for new and innovative ways to grow their businesses, create efficiencies, and improve responsiveness.

The pressure is now firmly on SMEs to deliver technology-led business outcomes for their organisations, said Bahl. He added that small software exporters must still devote significant time and energy to maintaining existing IT infrastructure, but current economic trends in India coupled with the increasing expectations of digital customers are redefining the way business is done.

SMEs should embrace this opportunity to move their organisations beyond traditional technology approaches and leverage IT to enable business transformation. By doing so, they may become true business leaders, he said. The opposite, according to him, is also true – the players that fail to seize this opportunity risk losing credibility within the business stream.

Samir Jain, co-chairman, Nasscom Chandigarh Chapter, and director, Net Solutions, said the sliding rupee may help IT SMEs post gains but they will have to align with the new realities. “Price arbitrage is not great any longer; better quality outsourcing and getting more expertise in new domains are now areas of concern,” he said.

“It is impossible to predict what would be the plight of SMEs in the long run, because the markets are quite volatile and if the currency appreciates, it would be difficult to absorb for SMEs,” Jain added.


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