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Software firms to report lower profit margins: Nasscom
April 28, 2003 19:11 IST
Profit margins in India's software industry are expected to narrow in the next few years because of rising competition, a slowdown in the main US market and higher costs, an industry body said on Monday.
"The days of very high profit margins in the industry are gone," Kiran Karnik, president of the National Association of Software and Service Companies, told a news conference in New Delhi.
During the 1990s, India's software exports consistently logged 50 per cent revenue growth due to massive global demand for its cheaper software. As a result, many software firms reported more than 25 per cent margins.
But in the past two years, the nearly $10 billion software export industry has been buffeted by the dotcom meltdown, the September 11 attacks in the United States and a sharp cutback in technology spending due to a slowing world economy.
These events have prompted leading software majors such as Infosys Technologies Ltd and Wipro Ltd to warn of sliding profit margins and slower growth.
"They (margins) were unrealistic, unsustainable and attracted competition," Karnik said. "In the longer period, I see margins in the teens."
Karnik said margins would be hit further as software majors were investing cash surpluses in expanding their workforce and presence in new overseas markets such Latin America and Europe or buying out competitors.
Lower profit estimates by firms have also resulted in a sharp erosion in stock prices as investors, once attracted to the sector's booming growth, are now pulling their money out of software stocks.
The gloomy outlook is reflected in the 38 per cent drop in the Bombay Stock Exchange infotech index since January. In comparison, the main index is down 13 per cent.
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