Industry Overview: The Big And The Bold

One big feat that the DQ Top 20 members were able to achieve in 2004-05 was
that they managed  to expand their
hold on the Indian IT industry. Fiscal '04 saw the DQ Top 20 companies at a
share of 50%-Rs 46,279 crore-when the total industry size was Rs 92,924
crore. This share went up to almost 52.6%-Rs 65,329 crore-in a total
industry size of Rs 124,039 crore next fiscal. In fiscal '06 they gained yet
some more, and now control 54.08% of the market-Rs 89,045 crore-out of an
industry total of Rs 164,652 crore. This effectively means that the existing Top
20 players put up an even better performance in the year 2005-06. And they
continued to work not just harder, but a lot smarter! Obviously, a better growth
rate was the prime reason for this consolidation. The Top 20 grew 36%: from Rs
65,329 crore in 2004-05 to Rs 89,045 crore last fiscal, whereas the industry
grew only 33%-from Rs 124,003 in 2004-05 to Rs 164, 652 crore last fiscal.

Shake-up in the Club

While the big brothers beat the smaller players in terms of market share
consolidation and growth, there were quite a few significant upsets in the Top
20 hierarchy. Among the top 5 players-TCS, HP and IBM managed to retain their
ranks. Wipro beat Infosys to take the #2 slot, after TCS. However, the next 6
ranks saw quite a bit of up and down: Satyam was pushed to #7 by Ingram, which
moved up from its #17 place last year after acquiring Tech Pacific to #6. The
other distribution giant, Redington, also moved up to #9 from its #11 position
in 2004-05 to dislodge Intel and Cisco.  Another
distribution giant, eSys, managed to find its way into the Top 20 club.

TCS however continued to increase the lead margin: in 2004-05 it was Rs 2,742
crore ahead of its nearest competitor Infosys; but last year it increased its
lead with Wipro, the next in line, by Rs 3,692 crore. Infosys has managed to
reduce the gap with #2, Wipro, and, on the same lines, HP has narrowed the gap
with Infosys.

Beyond the Top 6, Cisco moved from #11 in 2003-04 to #10 last year, and Intel
fell down two ranks to become #11. Lenovo entered the Top 20 club, not by riding
on IBM's PC business legacy (normal growth on that business of the previous
year would have placed it in the low thirties in rank) but by ramping up by well
over 200%, beating IBM's past performance hollow. Samsung, despite the
management shakeup (its former IT business head is in jail) managed to move up.
On the software side, Microsoft jumped a few rungs on the ladder to #14, up from
#19 the previous year, and Cognizant moved up from the 16th slot to #13. Oracle
moved down one place. There were two exits: Tech Pacific and i-flex; their exits
had less to do with performance and more to do with mergers and acquisitions.

OVERVIEW

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Top
20 Club 2005-06

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The
New Faces

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Ten
Years of DQ Top 20

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Big
Deal? The Year's Large Orders

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Consolidation:
Acquisitions, Mergers & JVs

Software exports focused companies, among the DQ Top 20, had outperformed
hardware vendors and distributors in 2004-05, and they continued this trend last
year too. The distribution players starred too: One mega-merger happened; and
another of them entered the Top 20, growing their share of the club from 11% to
13%.

However, if we look at the next 30 companies after the DQ Top20, there were
quite a few non-software players who showed amazing growth, such as Xenitis,
Dell, APC, and Redington. Among the entire lot of India's Top 200 players, Red
Hat clocked the fastest revenue growth of 423%, even though it was on a small
base of Rs 26 crore. But Red Hat's success story has made a lot of players sit
up and take notice. Another high growth player was Polycom at 104%, and because
it deals in conferencing solutions, its performance was worth taking note of.
Only 6 among the leading 200 IT players had negative growth last year including
the famous Tally, whose success story otherwise is the cause of envy for lots of
financial management solution players.

Finally, among the Top 200 IT players in the country, when one compares the
domestic versus exports focus players, and their respective positions, one will
see more shifts as the Indian market grows faster and becomes bigger. An
emerging trend to support this is the increasing number of channel players,
which have emerged in the list of India's Top 51 to 200 IT companies. They are
making money not just by box pushing, but by offering value added services such
as network and systems integration involving security, storage, and even network
management solutions. As markets in B & C category towns grow, we will see
more push coming from these players to move up the DQ list of the country's
Top 200 companies.

If we take buyers' perspective, it's evident that more small and medium
enterprises (SMEs) in the smaller cities prefer to buy IT solutions from vendors
that are close to them. The reason for this is that they want assured and
personalized services from the vendors with the objective to run their IT
operations smoothly. Though many bigger vendors are expanding their operations
in smaller cities either directly or through their channel partners, generally
their offerings are unaffordable for user organizations that are planning to
introduce or augment IT infrastructure. Plus, users argue that the bigger
players are not able to provide frill-free solutions, which are supposed to be
economical.

To exploit this demand-supply situation, more independent solution providers
are mushrooming in B & C category cities. However, the market can only be
termed as fluid, as most of these vendors are not fully qualified to deliver the
entire range of services to the user companies. Most of these vendors are trying
to become solution providers by expanding their operations from the consumables
sales. So the onus is now on IT managers to identify the genuine suppliers and
select the right solutions. This may be the reason that most buyers prefer
tailor-made solutions as opposed to of-the-shelf ones hawked by bigger players.
So this is an alarming situation for the top IT companies, as it'll be an
uphill task for them to penetrate in the small business segment, which, in fact,
holds enormous potential.

So it'll be good for the Top 200 players if they take the channels route to
expand their reach among the smaller users. However, it may not be easy for them
to offer economical solutions satisfying varied demand. But they can adopt
innovative concepts like mass customization to pull off economies of scale.
Plus, they need to strengthen the hands of their channel partners who could
offer even high-end services effortlessly to customers. Channels should also be
given the freedom to negotiate price and support issues with the buyer
organizations. That will help the Top 200 companies leverage the potential in
the geographically dispersed markets.

Top20: More Domestic Play

Though exports continued to be the bread and butter, and, therefore, the
focus, for many of the DQ Top 20, its contribution to the Top 20 kitty came down
a point from 55% in 2004-05 to 54% last year. That happened not because of any
decline in exports, but simply because one exporter, i-flex, dropped out of the
DQTop20 (it's now at #21) while two domestic players, Lenovo and e-Sys, came
in; even as Tech Pacific merged into Ingram (both domestic players).

High-value Orders

The Indian players are no more in the humdrum business sphere. The scope and
value of orders grabbed by them show that they're moving up the value chain,
as large domestic and global users are showing more trust in them. So this
should be celebration time for the solution providers who have got the
opportunity to prove their worth in the high-end market. While business is
pouring in from many parts of the world, the local IT companies are gearing up
to satisfy the buyers' demand that spans diverse requirements including
infrastructure management, application support, and solutions for specialized
domains like telecom billing, insurance, retail, engineering services, among
others.

Most companies that followed a reactive marketing approach are now becoming
more proactive in exploring the opportunities and offering solutions for
emerging needs. TCS, for example, smelled the potential in on-demand business
and became a strategic partner of salesforce.com, a technology and market leader
in on-demand customer relationship management (CRM). Under the arrangement, TCS
will develop and deploy on-demand business applications on the salesforce.com
AppExchange. Likewise, many companies such as HCL, Wipro, TCS, and others are
extremely aggressive in the managed services space.

Moreover, there are other potential areas such as engineering services that
are drawing the gaze of solution exporters. It's estimated that the worldwide
market for outsourced engineering is growing rapidly. Indian companies are
keeping a close eye on this demand. And TCS' contract with Ferrari last year
should provide a cue to others trying to explore offshore engineering services.

Another trend is visible, as now it's not only the advanced US market that
prefers to buy solutions from Indian vendors. Even small countries are showing
increased interest for solutions supplied by Indian IT companies. Take Saudi
Telecom Company, for example. It preferred to place the Rs 253-crore order on
TCS for customer care services and billing solutions. Such orders are in fact
giving an opportunity to suppliers to reduce their dependence on the traditional
US market. For this, vendors are also spreading their operations in the European
markets. This is evident from the Rs 1,500-crore contract that HCL won from DSG
International (a European company) for providing applications, systems, and IT
infrastructure. Similarly, Infosys has signed a three-year offshoring contract
with Australia's Mayne Group. The order will cover application support and
change management for the company's SAP finance and payroll applications.
Moreover, NIIT Technologies bagged a European insurance and financial services
contract from major Generali Group to revamp the Group's IT systems. Patni
Computers is also supplying its services to The Carphone Warehouse of UK for
supporting its warehouse delivery platform and wireless and Mobile Virtual
Network Operator capabilities.

Today, even big global user organizations are showing utmost faith in the
capabilities of Indian suppliers. Wipro has proved this by taking a five-year
order from General Motors for IT services. Similarly, Satyam grabbed a six-year
contract from Nissan Motor to maintain, support, and enhance its application
software portfolio. These orders indicate that Indian players are moving up the
value chain, and have attracted even the large buyers for their services.
Supported by their enhanced domain knowledge, they're able to satisfy the
global customers in the high-end application domains.

The objective of most players is to strengthen their bottom lines by
delivering high-value services that also ensure higher margins. Since most
players in India have deeper pockets now, they prefer to acquire small companies
abroad to gain sufficient skills to execute orders in specialized niche areas.
This helps them conserve time to market their services, as they realize that the
delivery and deliverables are equally important to attract buyers in the
cut-throat marketplace.

Alliances Galore

Today, most big Indian players have realized the power of togetherness. To
create competencies without losing time, they're forming alliances with global
companies. The partnerships are in the form of acquisitions, mergers, and joint
ventures. While smaller companies are being acquired by the Indian players,
they're going the JV route with bigger ones to quickly gain skills to satisfy
the global demand. Wipro, for example, spent over $300 mn in the last three
years on acquisitions by taking over smaller companies with deals in the range
of $10-75 mn. However, it preferred to form a JV with Motorola for managed
services. Similarly, TCS, Infosys, Rolta, NIIT, and other companies are
developing partnerships of various types with other global players.

It's basically their urge to tap the emerging opportunities that IT players
are joining hands with specialized global companies for a range of market areas,
including dedicated software services, business process outsourcing, banking,
managed services, and so on. TCS' JV with AT Kearney Procurement and UGS Corp,
for example, is for setting up Asian Sourcing Network. The initiative is aimed
to enable manufacturers to electronically source machine parts from low-cost
countries. Allured by the Chinese potential, TCS has set up a JV in China in
collaboration with three Chinese firms. There are other players also that are
moving toward China. Satyam, for instance, has formed a JV with Microsoft China.
The deal is to establish a Satyam Microsoft Adaptive Solution Center to jointly
develop an enterprise solutions market on the Microsoft platform. The deal is
aimed to target the demand in China.

Wipro has consolidated its positioning in the infrastructure management space
by acquiring cMango, a US-based consulting firm. The company's shopping spree
is spread across different countries to gain presence in the local markets. It
has acquired European design firm NewLogic, Finland-based Saraware, Portugal
company Enabler, and others. It's believed that with these alliances, Wipro
will be able to diversify its service portfolio and expand its customer base in
different countries.

Joint deals also abound on the BPO front. TCS, for example, has acquired a
BPO firm in Chile, Comicrom that deals in banking and pension segments.
Likewise, Satyam's BPO division, Nipuna Services, has gone to Hungary for
setting up BPO operations there, while it already has similar operations in the
USA and the UK.

The collaborations are also happening in niche areas like engineering
services. Take the case of Rolta, which has signed a JV agreement with Stone
& Webster Inc, an affiliate Shaw company, to target the high-end engineering
and design services market. Thus, the number of such alliances is increasing
constantly.

While companies are doing this for mutual gains, customers stand to gain, as
they get expert services quickly. These alliances also ensure supplier proximity
for the buyers, as the suppliers are readily available to provide services and
after-sales support.

Pouring Investments

One of the most important economic objectives for any nation is to attract
industrial investment for ensuring sustainable development. Of late, information
and communication technologies (ICT) sectors have shown great promise in India
for attracting foreign investment. A few years ago, most transnational players
wanted to operate in or from India to exploit the cheaper manpower. However,
today it's also the quality that draws. Plus, there's a huge potential in
the Indian market that they want to leverage for business. Microsoft, for
example, which is striving to get volume sales in India by offering local
language software and other low-cost products, has decided to consolidate its
presence here by planning an investment of $1.7 bn. Attracted by the integrated
communications demand among the growing Indian enterprises, Cisco has decided to
plow in over $1 bn investment. Likewise, Intel's is also going to be an over
$1 bn spread over a few years. IBM has a still stronger commitment by promising
to increase its investment to a whopping $6 bn over the next three years.

All these investments prove the maturity of the Indian market and the
increasingly pleasant investment climate for MNCs.

Around the Corner

While the big boys almost control the industry, there are quite a few who
will pose a challenge for those in the Top 20, and the next 30 players, and then
the next 150 positions. Those who will have to be closely watched by the Top 20
leaders are SAP, which has shown astonishing growth rates; APC, the company that
is now much more than a UPS company it used to be by offering products and
solutions for the entire physical layer; Flextronics whose focus on the hot
telecom vertical is taking it to great heights; Dell comes with a different
business model, and now with aggressive India plans including manufacturing; and
Acer who is riding the laptop and mobility wave.

It's true that the Top20 and the next 30 are increasing their pie size in
the total industry. But their aspiration to grow and grab more market share is
on everybody's mind. Beyond the Top 50 companies too, there is an increasing
queue of very aggressive players, who are smaller, and likely to manage strong
growth too, waiting to join the group of big boys. Times are surely going to get
hotter and more interesting in the next few years.

Ibrahim Ahmad

ibrahima@cybermedia.co.in