Financials: Year Of Achievements

The advance of the Indian software sector, both in terms of
numbers as well as other accomplishments, continued unabated during fiscal 2006.
It is now beyond doubt that some of the leading companies are enroute to
becoming Fortune 500 companies in the near future. The solid growth has been
possible not only because India is well placed as an outsourcing destination but
also because of a carefully developed strategy of building marketing and domain
skills adopted by the Indian software companies. They have taken solid steps
toward better market penetration through expansion of global presence as well as
acquisition of strategically important companies.

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Methodology Finding one metric to measure all companies of different sizes, ages and segments is an almost impossible task. We have used a set of static and dynamic parameters to determine the overall rankings. These include sales, profits after tax, gross fixed assets and return on capital employed as our static criterion. Growth in sales, profits and assets of a company that are dynamic in nature have also been used to rank the companies. Starting with sales, most of the figures reveal a high degree of skew. This means that a few companies at the top have very high profits and sales while a vast majority have very low figures. When ranking such a sample, variance in the data makes simple ranking difficult and even unfair. To avoid the problems of simple ranking when the data is skewed, as is the case of IT companies, consequently, proportional ranking has been used for this purpose. This implies that the top ranking company in any parameter, say sales gets 100 points and the following companies are given points in proportion to their sales achievement against the first company. Thus a company, which may be second in line but has only half the sales of the first one is given only 50 points. Companies who are at the bottom of the list would get very few points. This, in overall terms, gives importance to size in ranking rather than just a position in the list. All parameters are necessarily not equal in importance and equal ranking of parameters may not have been the best choice. However, to avoid any subjectivity in our rankings, we chose the equal weightage for all parameters.

Big Fat Acquisitions

The biggest acquisition story of the year happened in August 2005-i-flex
was taken over by Oracle in a deal estimated at $900 mn. This proves the
emergence of product companies in India that have the potential of becoming
global players. In fact, Indian product companies too have been active in
mergers and acquisitions. Even mid-market companies are aggressively looking at
these as a means of further growth. Subex acquired assets of Mantas for $2 mn.
The company operates in the telecom software space. Cranes Software, an emerging
player in the scientific software market, acquired the sales and marketing
rights of InventX, a project portfolio management solution, and EMRC, a player
in the CAE markets.

In the software services arena there were many more
acquisitions. The larger companies, who acquired companies typically with strong
market presence or with domain skills in which they were weak, especially did
this. TCS acquired Australian core banking solutions company, FNS, for $26 mn.
Another major acquisition was of mPower by Wipro for $28 mn. The company
operated in the area of payments for credit card companies and other financial
service providers.  Wipro was quite
aggressive and also acquired NewLogic, a system on a chip (SoC) design firm
based in Austria, for a total consideration ofÂ
$56 mn.

Among mid-market companies too, acquisitions and
consolidations were part of the corporate strategy. KPIT acquired two companies:
including a 90% stake in Washington DC-based Solcentral for $2 mn. Solcentral
provides business intelligence solutions. It also acquired a France-based
company, Pivolis, focused in the financial services domain. 3i Infotech,
formerly ICICI Infotech, acquired SDG Software Technologies with products in the
banking and financial services sector. Another emerging company, Four Soft, the
transportation and logistics software company, acquired the logistics software
business of DCS Transportation for an estimated $19 mn. This acquisition would
significantly expand customer base of the company.

There were numerous JVs and strategic alliances in the
year. The year made the companies realize the need to ally with them in the
market place rather than try to do everything on their own. HCL Tech signed a JV
with NEC of Japan to create a new entity to cater to Japan markets that have
been difficult to penetrate for most Indian companies. TCS and SBI also set up a
JV company to undertake banking related software development.Â
Among other corporate activities, Infosys acquired the stake of Citibank
in its BPO subsidiary Progeon. While Satyam exited from its stake in Sify, TCS
merged with Tata Infotech concluding the long expected merger in the market.

Going Public

The IPO markets were quite buoyant in the earlier part of the fiscal and
quite a few companies entered the markets for raising money. Paradyne Infotech
raised Rs 13.8 crore with its issue getting oversubscribed 44 times. Pune-based
Compulink Systems also raised over Rs 27 crore from the market while Delhi-based
FCS Software Solutions garnered Rs 17.5 crore from the markets. Bangalore-based
Sasken Communications and R Systems also went public during the year. From
January onwards the markets have been cold towards IPOs and quite a few of them
have been postponed and even withdrawn due to poor market conditions. We don't
expect strong activity in this area for some time especially with respect to
software services companies.

Next Year Winners

The continuing dominance of large companies and some niche ones in the
rankings over the years remind of the limited scope for mid-market companies to
create a mark unless they focus on a niche or develop IPR. Another feature to
note is that the maximum growth in market capitalization is not in the big
companies but in the small companies either in the product domain or with
specialized services. We believe that while the larger companies will provide
moderate returns to investors with limited downside, the smaller product
companies would be the one to watch for in the area of stock market returns as
well as creating new milestones the next year. While all of them may not show up
in the rankings we believe, over the longer term, these companies will outshine
the current leaders in many ways.

Continuance of the improving fortunes of the global technology sector and the bullish conditions in the Indian bourses saw the CNXIT index moving northwards by 48% outperforming NASDAQ which went up by 18%. On the other hand, the NIFTY moved by 65% outperforming the CNXIT by a considerable margin

Continuance of the improving fortunes of the global
technology sector and the bullish conditions in the Indian bourses saw the CNXIT
index moving northwards by 48% outperforming NASDAQ which went up by 18%. On the
other hand, the NIFTY moved by 65% outperforming the CNXIT by a considerable
margin. We believe with the increased volatility in the stock markets, due to
the rising fears of inflation and interest rates, the technology sector would
perform better than NIFTY in the coming months and investors would do well to
stay invested in technology stocks.

On a y-o-y basis, the total market capitalization of the
top 59 companies increased by 53%. The top ten companies in the list saw an
increase of 51%.  Whereas the bottom
10 saw an increase of 12%. Top 10 companies constituted 89% of the market capitalization
of this sample. The data used for this study was strictly
based on the latest audited figures available from the companies. Consequently,
a few companies' fiscal year ended on March 31, 2006 was not available. Hence,
prior year figures were used. Similarly, companies whose year ending is 30th
June, 30th September and 31st December, the data used pertains to the previous
year. The data is assumed to be authentic considering these are based on audited
figures. However, given the fact that the data pertained to different
years-2005 and 2006-inter-company comparisons cannot be made or necessarily
reflect the current performance of the company.