Top tier Indian software companies should see strong topline growth in FY04 due to the country's emergence as an attractive destination for outsourcing, while the volume-led growth would keep margins under pressure, according to credit rating agency ICRA's report on information technology.

"The primary reason for the growth in topline is India's emergence as an attractive destination for outsourcing. Though the global as well as the United States' IT spending still remains subdued, India has gained more visibility as an outsourcing destination," the report said.

However, in the changed market conditions, these players would resort to introduction of new service line, moving to a multi-layered relationship model, increasing expense on brand-building, hiring local talent and competing with global players on their turf, it said.

ICRA said revenue growth would derive from volumes and pricing pressure would keep the margins low; many other external trends would also lead to lower margins.

"Areas like IT sourcing, business consulting, which are less profitable than IT services, are gaining popularity. The other factor is that large projects could necessitate price discounts and software players in their bid to gain volumes have been sacrificing on the price front," ICRA said.

As the relationship grows with clients, aspects such as disaster recovery, multi-location development centres, IT security would start becoming important with their resultant impact on margins. Over time, competition from global MNCs in offshore models would increase, which would further be a drain on margins of Indian software players, it said.

In the short run, the pressure on billing rates from customers and intense competition among existing players for market-share and survival are likely to underline performance.

In this context increasing use of IT enabled services could contribute to sustainable growth.

Software companies that are able to leverage their capabilities, infrastructure and customer network to get a headstart in the ITeS space may benefit from the greater stability of revenue streams.