Tech

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Seventeen years ago an Indian man from New Delhi mesmerized the technology departments of global corporations with a doomsday story many times more puffed up than the luxuriant crop of hair he sported.

The latter was a wig, and the former was just bad science fiction packaged by consultants as a $600 billion hair-raiser. But Dewang Mehta, the chief lobbyist for India's fledgling software services industry, carried off both with aplomb, convincing businesses that at the stroke of midnight of the new millennium, their computer systems would crash because old programs measured years in two digits instead of four. The solution, he persuaded them, was to let a horde of techies from Bangalore and Hyderabad go through each line of code and fix the Y2K bug. 

That was the birth of India's massively successful software services industry, which died Friday after a short battle with newer digital technologies. At the time of its demise, the business was worth $110 billion in annual export revenue.

The first hint that the end was near came on Thursday when Tata Consultancy Services, the biggest Indian software vendor by market value, announced a virtual stalling of its business in the September quarter from the previous three months. After Infosys followed up by slashing its full-year revenue guidance for the second time in three months, it was time to turn off the ventilator.

A coroner's inquiry unearthed three signs of decay, the first of which shows how Indian companies' cheap-talent-fueled growth ran out of breath. In the four quarters before the collapse of Lehman Brothers, Infosys saw revenue increase an average 29 percent in constant-currency terms. Back then, Dublin-based Accenture's growth was just half as high. But there's nothing exceptional about Indian companies' expansion anymore. All that investors have heard from managements this year is gloomy commentary on how challenging it's become to get clients to open their wallets. When the companies do make news nowadays, it's more often for dodgy business practices, regulatory slaps on the wrist, and senior-level exits.

End of Exceptionalism
Indian software companies' outsize revenue growth is a thing of the past
Source: Bloomberg
*year-on-year growth, in constant-currency terms

A slowdown alone wouldn't have stopped the Indian industry if it had been able to embrace "smac," or social, mobile, analytics and cloud-based technologies. But the vendors wasted so much time defending their legacy business of writing code for and maintaining purpose-built enterprise applications that they failed to make a mark in the new digital world. 

As this analysis from India's Livemint online newspaper shows, the dominant trio of Tata Consultancy, Infosys and Wipro between them had 1.5 times more workers doing digital stuff last year than Accenture. But the revenue they garnered was 40 percent less than what the latter chalked up from newer technologies. That makes the typical digital-tech employee of an Indian vendor 25 percent as efficient as his counterpart at the global consultant. This gap sets the clock back on Indian companies, which have taken years to narrow the productivity differential:

Catching Up No More
Revenue productivity per worker at Indian software exporter TCS relative to Accenture is falling
Source: Bloomberg
*Four-quarter moving average

Maybe it's just banking clients and their inability to pay like they once did. Or perhaps it's a combination of weak global growth, Brexit, protectionism and Donald Trump's vacillating stance on U.S. visas for Indian technology workers. Hoping that turbulence is temporary, investors are still paying a hefty premium for future growth. They may get lucky for a while. Still, a dead-cat bounce from delayed orders coming through would hardly count as proof of life.

Fond Hopes
Indian software vendors command a higher valuation premium for expected earnings growth now than before the 2008 crisis
Source: Bloomberg
*Price-to-earnings ratio divided by long-term estimated earnings growth

The millennium scare got Indian software a foot in the door at global corporations. But now the shoe is on the other foot. Robotics and artificial intelligence are putting the vendors' labor-intensive business at risk of obsolescence. Even if the concern is as puffed up as Y2K, with plenty of growth candidates in the Indian start-up world, at least for some investors it may be time to back new horses rather than flog dead ones.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net