Rupee appreciation hit all the exporting industries in the first quarter of the current fiscal and so the two earlier (December '06 and March '07) and subsequent quarters (June and September '07) give a clear idea of how the scenario has changed and how the leaders are coping with it.

Both growth and profitability in the first two quarters we are examining were phenomenal. Infosys [Get Quote] led in both top line growth and margins. Wipro [Get Quote] also displayed robust growth but the figures include businesses like personal care and lighting, which have also lately done well.  

The current year first-quarter figures clearly show how the tidal wave of currency appreciation hit the firms. Infosys and Wipro actually registered negative sequential top line performance. Profit margins of all the three took a hit. But what is remarkable is the way all three recovered in the latest quarter. Sequential top line growth picked up to around 8 per cent for Infosys and TCS [Get Quote], whereas Wipro's shot up by nearly 14 per cent, enabled no doubt by the robust growth of both its non-IT businesses and Indian IT operations.

In the latest quarter Infosys has improved its net margin to what it was in the December quarter but TCS and Wipro have not sacrificed margins to achieve growth. In fact, all the three have been able to secure price rises, indicating the clout they have with their clients and the value they bring to them. Infosys led the price rise stakes with a 2-4 per cent rise, depending on whether it is an old or a new contract, the other two securing rises of near to but less than 1 per cent.

How did this pickup happen? These software leaders have put through a fundamental change in their business model, something which was in the works but was initiated in rapid quick time in order to tackle the rupee rise. The new model has three elements - become global in terms of capability footprints (development centres), go in for aggressive acquisitions that included taking on the employees of the acquired entities and go up the value chain by offering more client-business-partner type solutions.

This has meant moving away from reliance on coding and maintenance work, breaking the linearity between revenue and effort (you should no longer be able to get the top line by multiplying  effort by hourly wage rate), and having a multilateral footprint and a multinational workforce.

To this has to be added doing business in India. Both Wipro and TCS are gaining from a reasonable Indian presence (TCS has won a large deal from BSNL) but the clear winner is Wipro through its division Wipro Infotech, which is clocking phenomenal growth by reaping the benefits of being in the right place at the right time. It has built up its presence in the low-margin Indian market over time with offerings like infrastructure management and is now ready to reap the gains when the skyrocketing exchange rate makes every rupee earned that much more valuable.

In contrast, Infosys has been much the most conservative and is trying to catch up fast. It is only last week that it announced an Indian division, something that it could have done earlier. News of large acquisitions is eagerly awaited. It has also lately begun to go in for deals that involve taking on board client employees (the Philips deal) and setting up development centres globally - in Atlanta in the US and Monterry in Mexico and expanding the Czech facility. TCS has of course been serious about a global working footprint all along, with a considerable presence in Latin America, Europe and now in China.  Infosys' earlier business model has stood it well but it will have to learn new tricks fast if it wants to remain in the lead when the competition is not far behind.

Most Indians may not realise how global their IT firms are rapidly becoming. Very soon they will begin to resemble typical MNCs more and more. The days of bringing most of the work to India and getting the rest done by Indians sent out are slowly receding. A rapidly growing international management team and work force will put a downward pressure on margins, which will have to be kept up by executing more high-value work.

In the foreseeable future, the Indian leaders' margins will still be well ahead of their competitor global incumbents but these will probably very gradually decline over time. This will be a natural price to pay for becoming mature and truly global. The upside is that over time top Indian software names will become as globally recognisable as, say, Nokia or Samsung.