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India's software firms to reap outsourcing windfall

Having ridden out a global technology slowdown in style, India's world class IT services and software exporters are seen picking up business as overseas clients from a range of industries outsource to cut costs.

Analysts say the worst is probably over, and that 2001's soft demand is yielding to steadier order flow. Hiring is picking up and client visits are on the rise.

But even optimists are not expecting a return to the heydays of two years ago, when Bangalore's code-churning giants scored 100 per cent a year sales growth.

"There are more positives than negatives for the industry," said Sujit Sahgal, head of Asian software services research at UBS Warburg in Singapore.

The National Association of Software and Service Companies has forecast IT services and software exports to grow 30 per cent in the year to March 2003, after managing 29 per cent growth in the previous year.

Software service exports totalled $7.5 billion last year, just missing the NASSCOM's 30-35 per cent target, while the US -- making up 60 per cent of demand for India's software exports -- dipped into recession.

In fact, the downturn helped bring new clients to India's IT services sector.

Budget squeezing retailers, and financial and insurance firms are taking over from grounded telecom clients in seeking cheaper outsourcing solutions.

India's software exports contribute about 16 per cent to the country's total exports and are the fastest growing segment.

But even as prospects improve, software giants Infosys Technologies and Satyam Computer Services are forecasting flat first-quarter sales and profit.

HIRING THAWS, PRICING STABILISES

After laying off workers last year, top Indian tech and IT services firms have resumed hiring.

But they aren't just hiring anyone. New jobs are going for candidates with niche skills and some experience.

This is a far cry from the Internet boom years, when managers quipped, "Trespassers will be recruited."

Bhupinder Ahuja, IT services analyst at Deutsche Securities in Mumbai, sees higher demand and proposals for large orders brightening prospects for the sector.

"We are at a stage where prices might be stabilising," he said, referring to annual price negotiations, which saw sharp cuts in billing rates last year.

Average prices for software services offered from India have fallen by more than five per cent to $20-25 per hour from last year, far below the $30-35 peak seen during the Internet boom.

Fund managers have cut exposure to the software sector after the growth rates sobered, but are still betting on a US recovery.

For Ashim Syal, chief investment officer at ING Investment Management, the game of investing in Indian technology is as simple as the game of cricket, when the US economy picks up.

"When you get a hard track, it is easier to hit a century," said Syal. ING Investment Management has over Rs 800 million in Indian stocks, more than half of that is in tech stocks.

Analysts say old economy and new economy valuations are levelling.

They say shares of Infosys and Satyam are at about 26 and 15 times their respective estimated earnings for 2002-03 compared to price-to-earnings ratio estimates of 18 for medicine maker Ranbaxy and 28 for consumer goods giant Hindustan Lever in current calendar.

India's information technology index, among India's worst performers in 2001, has risen one to two per cent this year compared to a five to six per cent rise in the broader market.

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