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Uday Khandeparkar, Dow Jones Newswires

India's software firms are boosting their staff numbers by a quarter at a time when companies worldwide are scrambling to cut costs, reflecting their confidence that they can keep growing despite tough market conditions, although a conflict in Iraq could temporarily disrupt business.

The National Association of Software and Service Companies (NASSCOM) said in estimates given last week that India's software and services industry would have increased its staffing levels by nearly 25% to 650,000 employees in the fiscal year ending March, 2003.

"We saw a pickup in the recruitment scene in the IT Services sector from the second quarter of the (fiscal) year," NASSCOM's Chairman Arun Kumar said. Other industry officials said the trend had continued well into the current January-March quarter.

NIIT Ltd. (P.NIT), the country's biggest computer education firm, which had in the fiscal year to March 2002 seen a sharp fall in its number of students, expects single digit revenue growth this year.

"Hirings are coming back and this shows the software industry expects good growth over the next few years," said NIIT Chairman Rajendra Pawar.

So far though, the markets haven't been very enthused over indications that revenue growth is on track, mainly because analysts recognize that an increase in business is coming at the expense of lower profit margins.

"Volumes will be coming in big time but profit margins will go down to around 15 to 20%," said Gurunath Mudlapur of Khandwala Securities, considering it a disappointment for an industry which until last year had earnings margins of over 30%.

"Software stocks aren't a huge buy at the moment," Mudlapur said, though another fund manager said he would still put his money on the big firms like Infosys Technologies Ltd. (INFY), Wipro Ltd. (WIT), Satyam Computers Ltd. (SAY) and i-flex Solutions Ltd. (P.ISX).

"There is still some upside left in IT, but I'd stick to the big ones because scale is paying. Also, these are trusted names," said R. Balakrishnan, chief executive at First India Asset Management Ltd.

Conflict In Iraq Could Temporarily Disrupt Plans

Industry officials though worry that a conflict in Iraq could affect revenues in the July-September quarter of 2003.

"The impact will be felt with a one-quarter lag because today's orders translate into revenue flows then," said Ravi Ramu, Chief Financial Officer of MphasiS BFL Ltd. (D.MBF)

For the industry, the waxing and waning fears over a possible war in the Gulf has made projections for 2003-04 difficult.

"It is a bit of a hotchpotch. Some people who had made travel plans previously are going ahead, but new travel plans aren't happening quickly," said Ramu of visits to India by mainly U.S. customers.

Infosys, one of India's biggest three software firms, reflected that uncertainty when its managing director Nandan Nilekani said this week: "Any time there is a threat of conflict, there is bound to be uncertainty in the market place, not just in our business but in any business".

But Ramu felt any impact would be temporary and the flow of orders would be restored as soon as things cleared.

The world's troubles and tough global business conditions have in fact helped India as firms under pressure to contain expenses have outsourced more and more jobs to India's low-cost software firms.

The outsourcing trend is expected to continue. A recent study by IDC said spending on IT outsourcing worldwide is expected to rise to $41 billion by 2006, up 7% from 2001.