Nasscom figures on software exports inaccurate

India's software export earnings could be overstated by 25 to 30 percent, an analysis of figures put out by the National Association of Software and Services Companies (Nasscom) and discussions with software exporting companies show.
Written by ZDNET Editors, Contributor
India's software export earnings could be overstated by 25 to 30 percent, an analysis of figures put out by the National Association of Software and Services Companies (Nasscom) and discussions with software exporting companies show

MUMBAI (ZDNet India) - That's because companies (and Nasscom) report gross export figures - and they typically spend 25 to 30 percent of their earnings abroad. Indeed, Atul Nishar a member of Nasscom's executive committee, obliquely confirms that the association reports gross figures when he says that Nasscom uses corporate balance sheet statistics.

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Explaining why software export statistics are gross figures, Digital India's president and CEO, Som Mittal, says: "Almost 25 to 30 percent of the work for most Indian software companies is done onsite." (The exception to the rule: Wipro, which spends almost 70 percent of its export earnings overseas as it tries to build up its global business.)

Mittal adds that 75 percent of the export earnings are net foreign exchange earnings and about 25 percent is spent abroad.

The point is backed by the examples of Infosys and Tata Consultancy Services (TCS). Of its total export revenues of Rs 851.72 crore (US$182.4 million) in 1999-2000, Infosys spent Rs 261 crore (US$55.9 million) - roughly 25 percent of its total revenues -- on the software development business abroad.

Says V V Easwaran, vice-president (finance) at TCS: "Close to 25 percent of the money the company earns from the international markets is spent on maintaining resources abroad." The items of expenditure include training, research and development and sales and marketing activities.

In the case of Satyam Computer Services too, exports accounted for 89 percent (Rs 671 crore, US$143.7 million) of its total revenues of Rs 756 crore (US$161.9 million) for the year ended March 2000. But during the year, the company spent Rs 233 crore (US$49.9 million) at its overseas branches. So Satyam too spent about 30 percent of its export earnings overseas.

Nasscom has predicted that software exports will soar by 51.1 percent this year, earning revenues in the region of Rs 28,500 crore (US$6.24 billion) in fiscal year 2000-01, up a hefty Rs 11,350 crore (US$2.4 billion)from the Rs 17,150 crore (US$4 billion) the industry earned during 1999-2000.

Just how realistic is this claim? And if the growth claims are substantiated, how much of the export earnings are brought back to India? How much too is accounted for by overseas subsidiaries and how much by their Indian parents? If most of the revenues are earned by overseas subsidiaries, can the Indian software industry truly claim that it is earning whopping sums from exports?

Take the first question.

Is Nasscom setting its sights too high?

The US economy is slowing down after all and the US accounts for a dominant 58 percent of India's software exports. But ask Nasscom president Dewang Mehta whether the US slowdown will put a crimp on Indian software exports and he replies with supreme confidence: "In the last few weeks there has been talk of a slowdown in the US economy and its possible effects on Indian software exports.

"We have been speaking to our member companies, analysts and major clients. Based on our discussions, we expect no slowdown whatsoever and are confident of meeting our export target."

To be sure, software exports have been on a roll. During the first nine months of this financial year, 17 listed software companies, which accounted for 28 percent of exports last year, exported software worth Rs 6,071.66 crore (US$1.3 billion) -- clocking an annualised export growth rate of 65 percent.

If unlisted software export major Tata Consultancy Services (TCS) were to be included, the rate would be even higher.

TCS hasn't released quarterly export figures. But the Tata company reported exports of Rs 1,820 crore (US$390 million) in 1999-2000. Extrapolating even a 50 percent growth rate in its exports, its exports during the nine months should be in the region of Rs 2,400 crore (US$514 million).

The industry has some 1,250 companies, but the top 20 accounted for almost 55 percent of exports in 1999-2000, according to Nasscom statistics. To assess where software exports are headed this year, it's useful to cast an eye at the performance of the other big boys.

Exports by Infosys Technologies, the major export earner during the nine months, grew to Rs 1,321.56 crore (US$283 million) from Rs 869.70 crore (US$186.3 million) during fiscal 1999-2000 or by a whopping 103 percent on an annualised basis.

In the nine months, Wipro Technologies' exports of Rs 1,279.62 crore (US$274.1 million)surpassed the entire previous year's exports of Rs 1,044.12 crore (US$223.6 million). Satyam Computers earned Rs 811.01 crore (US$173.7 million), up 76.8 percent from the previous nine month's export earings, and Pentamedia Graphics Rs 388.81 crore (US$83.3 million), up 38.7 percent.

Nasscom also sees communications software exports (CSE) growing strongly in the short run. It expects $900 million alone from CSE in 2000-01, a huge 100 percent increase from the $460 million in 1999-2000.

In short, software exports are growing by leaps and bounds, as Nasscom declares.

Question two: How much of these export earnings are brought back to India?

Mehta says that export revenues are brought back to India -- minus what's spent abroad, of course. That's true enough. Most of the big software companies report their export earnings in their annual statements. And since most also follow US generally accepted accounting practices, they're unlikely to understate earnings.

Question three: Can Indian companies truly claim to be exporting software from India when the revenue is earned by subsidiaries or development centers abroad?

Software exports fall into two categories: on-site services and off-site services. In the first case, software is developed at the client's site. In the second, software is developed in India and exported either in floppies and compact disks or via satellite and earth stations.

Almost all the big companies offer on-site services. They are truly exported oriented units. Almost all of them earn anywhere between 80 and 95 percent of their revenue overseas (94.38 percent for Infosys, 90 percent for TCS).

Domestic business account for a piffling share of revenue (1.37 percent, for Infosys, about 10 percent for TCS and 11 percent for the Satyam group).

Indeed, roughly 77 percent of Infosys' revenues come from North America, including the US and Canada, with Europe contributing 14 percent and the rest of the world another 6 percent.

So, can earnings from overseas operations be put under the exports head? Some tax experts think they can.

Says Amar Mehta, a director at Tax Consulting & Compliance Services, Ernst & Young: "It is legitimate to include earnings from overseas operations under the head exports as the work for the overseas operations is being done by people who have been sent from India. The work is being done there so that it is customised to that particular market's requirements."

Make no mistake: the software export boom is for real for now. Indeed, a joint McKinsey and Nasscom study released some months ago predicted that India centric companies would earn revenues of $12 billion by 2008.

The real challenge for India's software companies is whether they can move up the value chain quickly enough and take on global software giants.

But that's a different story altogether.

Source: Capital Markets

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