Bright outlook for India's IT industry

Posted in India | 26-Jul-06 | Author: Siddharth Srivastava| Source: Asia Times

Siddharth Srivastava is WSN Editor India.
NEW DELHI - Despite the stock-market crash, the future looks quite bright for India's information-technology industry. The top three Indian IT firms, Wipro, Infosys and Tata Consultancy Services (TCS), are reporting better-than-expected first-quarter results, strengthening India's position as the global software hub.

This month India's second-largest IT services provider, Infosys Technologies, announced results for its first quarter ended June 30 beating market expectations on robust outsourcing demand from Western clients. Net profit is up 19% at Rs7.94 billion (US$169 million,) a 40.2% year-on-year jump, while net sales are
> up 15% at Rs30.15 billion (45.6% year-on-year rise).

Infosys said the company and its subsidiaries added 38 new clients in the April-June quarter, which also saw them taking on board 8,097 employees, boosting the total head count to 58,409.

"Our efforts in building brand, developing the client base, and expanding strategic accounts have fueled our robust organic model,' said chief executive officer, president and managing director Nandan M Nilekani. Infosys rescued the stock markets from a major plunge after the suicide subway bombings in Mumbai.

India's largest software company TCS posted 35% growth in net profit to Rs8.83 billion on a 46% rise in income to Rs42.27 billion in the first quarter of 2006-07. The company announced a dividend of Rs3 a share.

"Growth was across the board," TCS CEO and managing director S Ramadorai said. "Financial services, retail and telecom saw greater momentum during the quarter. New service lines. such as business intelligence, assurance and consulting. are also driving growth."

In terms of geography, the United States' share in the total revenue dropped to 53.2% from 55.1% in the fourth quarter of the last financial year, while those of the United Kingdom and continental Europe rose to 19.9% and 7.8%, respectively. The company added 62 new clients in the first quarter and recruited 7,095 new employees.

Wipro, India's third-largest software exporter, announced its results for the quarter ended June 30. Profit after tax grew by 45% year on year to Rs6.20 billion; total revenue increased by 39% year on year to Rs31.43 billion; global IT services and products revenue was Rs24.51 billion, a 42% increase year on year, and profit before interest and tax (PBIT) was Rs6.02 billion and grew by 45% year on year; operating margin was at 24.6%, an improvement of 60 basis points year on year. Global IT services AND products added 62 new clients in the quarter.

Azim Premji, chairman of Wipro, said, "The results for the quarter were quite satisfying; we enhanced our strategic investments to sustain long-term growth even as we continued solid execution leading to improvements in operating performance."

Rising wage costs
If there is a cloud on this sunny horizon, it is rising wage costs. There are fears that IBM expansion plans will make it harder for Indian software giants to retain staff. Rising salaries will cut into profits. IBM, which has 43,000 employees in India, said last month that it would invest nearly US$6 billion over three years to expand its services, software, hardware and research businesses.
Multinational IT companies that include Accenture, Affiliated Computer Services, Computer Sciences Corp, Electronic Data Systems Corp and Hewlett-Packard are also looking at tapping into India's low-cost skilled resources, which will cause further manpower shortages.

Wages are already rising faster in India than in other parts of the region. According to the 2006 Salary Guide brought out by Kelly Services India, the country has the highest average salary increase at 13.9%, and employees from the IT industry at 17.9% have received the highest increase across all five groups surveyed. Kelly Services is a global provider of staffing services and solutions.

"This increase is of no surprise and is the highest in India compared with the rest of Asia since there has been heavy investment from global companies," said Achal Khanna, country general manager of Kelly Services for India. She added, "India still maintains the competitive advantage for providing the combination of the most cost-effective and high-quality manpower. Given the current economic climate, companies need to pay added attention to their existing salary packages and compensation benefits because it will make a key difference in retaining good talent."

Earlier, surveys by Hewitt Associates on salary increases in the Asia-Pacific region and by Mercer Human Resource Consulting, an employee-benefits consultancy and services provider, projected salaries would rise more in India than anywhere else.

Again, it is the IT and IT-enabled-services sectors where the maximum turnover is being witnessed. Faced with high attrition rates and shortages of skilled manpower, corporations have been doling out higher salaries to retain staff, which is not something that can be sustained over time.

India Inc has been worried by the recent flight of companies due to rising costs. It is one main reason (apart from requisite manpower and infrastructure issues) that firms such as Apple Computer and software maker Pervasive and Powergen, Britain's second-largest energy supplier, have recently closed their outsourcing operations in Bangalore, the Indian IT hub.

The National Association for Software and Service Companies (NASSCOM) has said that entry salaries have shot up between 11% and 15% in the past few years, while wages for senior managerial positions have risen by a whopping 30%. Analysts have said that labor arbitrage for India now exists only at the entry-level where engineers earn about $9,000 a year, about one-seventh of the wages for counterparts in the US.

Consultancy firm Stanton Chase International has said salaries of managers with 10-15 years' experience in the US were between $100,000 and $150,000, while in India they were paid at least Rs10 million (about $230,000). "During the start of the technology boom the top management people were paid about $65,000," said G C Jayaprakash, principal consultant of Stanton Chase.

"The most worrying factor [for foreign firms] is the steep increase in salaries. Big companies such as Cisco, Motorola and others are only hiring beginners and at lower managerial levels. This is for the simple reason that IT managers from the US can be accommodated at a much cheaper rate," he said.

According to a study by IT research and advisory company Gartner, "A lack of skilled workers over time will drive up labor costs as employees sell their skills to the highest bidder, thus eliminating the cost advantages." Most global Indian IT firms have begun implementing backward linkages to cheaper locations such as China.

Questions have also been raised about the quality of manpower, especially at the lower end. Powergen announced that call centers in India would no longer answer telephone calls from its customers because of complaints about the poor standard of service. According to NASSCOM, more than 3 million graduates pass out of colleges every year, and India produces 400,000 engineers annually but "of this only a very small percentage is employable".

But the overall picture does look good. NASSCOM president Kiran Karnik said last month that India's software and back-office service exports are on course to reach a target of $60 billion by 2010, from $23 billion in the fiscal year ended March 31, providing direct employment to more than 2.2 million people and nearly three times that number by way of indirect employment. Call centers are likely to employ a million more by 2009. Estimated contracts worth a combined $100 billion will be negotiated over the next two years.

The Indian software giants also have expansion plans in place. Infosys plans to hire 25,000 people this year. Its capital expenditure in the year to March 2007 is likely to be $400 million to $450 million, mainly for development centers. TCS said last month that it intends to invest Rs5 billion in a new center in Pune. It plans to add a total of 30,500 people this year to a payroll of close to 64,000.

Siddharth Srivastava is a New Delhi-based journalist.