Feeling the Shock Wave from America's Tech Crash

As contracts evaporate, India's IT companies face a shakeout

On Apr. 11, Infosys Technologies Ltd. (INFY ), India's top software maker, announced that after five years of sizzling 100% annual growth, its earnings will rise just 30% this fiscal year. That's still respectable but a shock to spoiled investors. They hammered Infosys' stock down 26% over two days, to $60, its lowest level in two years. That prompted India's information-technology industry stock index to fall 40%, dragging down such bellwether players as Wipro, Satyam Computer, and Hughes Software Systems.

Clearly, the U.S. slowdown is taking a toll on the Indian high-tech sector as American companies begin canceling contracts. This is a big setback for a slowing economy that was banking on IT to spark a comeback. And the troubles are almost certain to prompt an industry shakeout as smaller tech companies go under or are gobbled up by bigger rivals. Moreover, if the U.S. slowdown continues into next year, it could jeopardize India's hopes of staying ahead of increasingly assertive foreign rivals.

The U.S. clients that are pulling back on their Indian software orders are mostly technology or financial- services firms. They are not necessarily cutting spending, but they're not increasing it either. Thus NIIT Ltd., a large India IT services and education company, has issued a profit warning for the current fiscal year, and analysts expect Wipro Ltd. and Satyam to post lower growth, too.

NEW CLIENTS. Even India's usually bullish National Association of Software & Service Cos. says the industry will grow between 40% and 45% this year, down from the 52% rate of recent years. "It's still superb growth," insists association Chairman Phiroz Vandrevala. "Infosys is only 7% of the entire industry."

In the short term, analysts say, companies like Infosys and Wipro need to diversify their client list to become less reliant on the U.S. And in that regard, both companies are speeding ahead. Of Infosys' 37 newest clients, it says about half are from Europe and Asia. Wipro says its new European business is growing twice as fast as its U.S. business. The company is also forging ties with Japan, where it already services such clients as NEC Corp. and Sony Corp., and also plans offices in Taipei and Singapore. Still, the new business won't necessarily offset the slowdown in U.S. contracts. Vivek Paul, chairman of Wipro, says the uncertainty of the U.S. market worries him. "They're not making decisions," he says of American companies. "So everyone is losing."

So far, the big Indian IT companies are not radically scaling back their expansion plans. Wipro is continuing its push into software for autos, cell phones, and medical equipment. For its part, Infosys will spend $80 million this year expanding its offices in eight Indian cities. And it will add 2,000 staffers, though that is half the number it hired last year. Company Chairman N.R. Narayana Murthy, remains characteristically ebullient. "We're dedicated to improving quality and productivity and cutting costs," he says. "Given half a chance, we'll grow over 30%." In fact, many believe Infosys is overstating its problems and could grow 45%.

STRATEGIC RETREAT. In the long run, Infosys and Wipro must make good on vows to become full-service consulting powers to take on the likes of Accenture and Cap Gemini Group. If the U.S. downturn endures, they may have to postpone these plans and even take on such basic services as maintaining old mainframe and PC-based systems. "Indian IT companies should take revenue where they can get it," says Jayesh Parekh, IT analyst for Bombay's SMIFS Securities Ltd.

Most of India's IT players reckon the U.S. economy will start to turn around next year. At that point, they say, India's cost advantage in the services sphere will help it win new business. When U.S. corporations are ready to start spending on technology development again, companies such as Infosys, plump with previous years' profits, will be waiting, says Murthy.

The turning point certainly isn't here yet--and India's software companies must adapt to slower times. Both Wipro and Infosys insist that, as they diversify, they'll keep spending on infrastructure and training. "This is the time for braver companies to go after new markets," says Wipro's Paul. India's tech prowess depends on it.

Corrections and Clarifications "Feeling the shock wave from America's tech crash" (Asian Business, Apr. 30, 2001) should have said that Vivek Paul is president, not chairman, of Wipro Ltd.

By Manjeet Kripalani in Bombay

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