Are IT Firms Falling Behind?

In September 26, 2007, the BSE 30-share Sensex crossed 17,000
for the first time. And, what a rise it has been. While the index took just
about six trading sessions to move from 16,000 to 17,000, it took just five
weeks to reach from 14,500 to 17,000a gain of close to 20%.

That is good news! It reassures everyone that Indias economy
is under no threat, nuclear deal or no nuclear deal, Ram Sethu or no Ram Sethu!

However, unlike most of the previous surges, it was not Infosys,
TCS, or Wipro that were leading this time around. In fact, between the period
(see graph) August 24 to September 28, when the Sensex rose 19.9%, the top four
IT firmsTCS, Infosys, Wipro, and Satyamrose somewhere between less than
1-4%. The next threeHCL, Patni, and Tech Mahindrahad a comparatively
better performance with Tech Mahindra rising 11.2%, nevertheless not good enough
to match the Sensex.

The companies that led the rise of the Sensex this time were
Reliance Industries, Reliance Communications, and ICICI bank, all
domestic-focused companies.

In IT, though there are not too many domestic focused software
and services firms that are listed in the market, almost all of them performed
much better. HCL Infosystems gained 28.1%; KLG Systel rose by 29.2% and Accel
Frontline by a whopping 61%. The only listed domestic-focused IT services firm
that could not match the Sensex was Tulip, the reason partly being its earlier
steep rise. But even then, it rose 13%, more than any of the top export services
firms stocks.

The reason for the completely opposite performance is not hard
to tell. It is the familiar rise of the rupee. As Dataquest said in its cover
story last issue, the rise of the rupee may well bring some attention back to
the domestic market. If stock markets are any indication, that perhaps has
begun.

Since most of the domestic firms, barring HCL Infosystems, are
much smaller than the likes of TCS, Infosys and Wipro, will the investor money
move away from IT, at least for some time, as long as the rupee continues to
rise? What does that mean for this industry? Will the ESOPs have their earlier
shine? And, what will that mean for an industry that survives only on finding,
developing, and utilizing talent?

India is IT, said a Nasscom tagline. Is it still?

Shyamanuja Das
and Sandeep Sharma

shyamanujad@cybermedia.co.in