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Bharat Kumar

The key reason for this `marginal' drop in OPM is increased competition amongst suppliers to grab the nearly flat market.

CHENNAI, July 29

DESPITE talk of a gradual revival of interest among clients, the software industry has not turned in impressive figures for operating profit margins (OPM) for the quarter ended June 2002 compared to the same quarter, the previous year.

In other words, if a company's revenues have risen, profits from operations have not risen proportionately. A look at the accompanying graph shows that the top three in the industry, Infosys, Satyam and Wipro have shown a slump in operating profit margins (OPM is operating profit as a percentage of sales). The rest, except for a few, have also followed suit with slumping OPMs.

Mr Bhupinder Ahuja, an analyst with Deutsche securities cites two reasons for this: ``pricing pressure has not come down, generally. Secondly, sales and marketing expenses have increased, as is stated by Infosys for its operations. For, if you have to contend with increased competition, your marketing expenses are bound to increase. Though utilisation rates, which were low same quarter last year, have become better now, it has been offset by the first two factors."

In other words, figures are contrary to claims that industry captains made in the middle of the last year: That operating profit margins will remain protected because work will shift offshore.

In the case of Wipro, offshore revenues as a percentage of total revenues have gone down from 50 per cent in June 2001 to 48 per cent in June 2002. In the case of Satyam too, says Mr Ahuja, ``Onsite has gone up from 41.4 per cent in June 2001 to 50.62 in the latest quarter. This is largely due to the fact revenue from packaged implementations — which predominantly involve onsite work — has more than doubled.''

Asked for comments, Mr V Shekhar Avasthy, Assistant Manager at IDC Software and Services analysis division, agrees with Mr Ahuja in that increased competition is the reason for slumping OPMs. He said, ``the key reason for this `marginal' drop in OPM is increased competition amongst suppliers to grab the nearly flat market. If we consider the massive hype about recession, a drop in OPM of just 2.3 per cent — overall — is not a cause for worry. A chunk of whatever billing would have happened in AMJ '01, would have been for projects signed in happier times, i.e., during 2000 and 2001 calendar years. On the other hand, the billing for AMJ 2002 would have been for projects signed during relatively bad times in 2001. In these bad times, the profitability was under attack, as demand supply ratio was favouring the users, who therefore had increased bargaining power. I feel that, overall, the ratio of offshore projects would have increased manifolds and thus this marginal drop in profitability is nothing to worry about.''

He added, ``any variation in OPM for all cases, other than the top three is not significant. In fact, if you remove the top three from the list, the data suggests that despite a fall in revenues for all others by 20 per cent, the OPM for them, collectively, has remained constant at around 27 per cent.''

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