When
Infosys made its Nasdaq debut on March 11, 1999, to raise $70.38 million, little
did it realize that it would be setting a trend, by being the first Indian
company to list on the US bourse. Satyam Infoway followed suit by being the
first Indian internet company to list on the tech-heavy Nasdaq. And today, a
year later, there are a host of companies, from software companies to portals,
lined up to test the US bourses. "Indian software companies have recognized
that listing on overseas stock exchanges is a means of growing their operations
globally. It is a well-accepted fact that in order to reach global scales
quickly, they would need to grow exponentially. The overseas listings are deemed
as a natural corollary to realizing global ambitions," confirms Dewang
Mehta, President, National Association of Software and Service Companies (Nasscom).
Lured by recognition
The recognition
that the Indian IT sector has received in the US has been one of the main
reasons for the mad rush toward the US markets. Moreover, capital is available
cheap in the US. The Government of India issued guidelines recently giving a
blanket nod for overseas acquisitions through stock swaps up to the limit of 10
times the company’s export earnings. This has given a shot in the arm of the
Indian IT sector, which is in search of inorganic growth. The new policy allows
automatic approval to companies that seek permission for overseas buy-outs
through issuance of American Depository Receipts (ADRs) and Global Depository
Receipts (GDRs), within the specified limit.
Inorganic growth
Acquisitions
are one of the reasons that have prompted Indian companies to go for overseas
listings. With Infosys and Wipro already asking the government for a nod for
acquiring companies overseas, it is imperative that other software companies in
search of talent and buy-outs take the ADR route. Moreover, with globalization,
it has become clear that if Indian IT companies have to retain the talent pool,
it is necessary that employees be given a dollar-based stock option.
"Aspirations of Indian software companies to globalize are borne out by the
objectives of reaching out to diverse geographical markets, moving up the value
chain, providing a competitive mix of products and services and growing the
revenue base inorganically. Overseas listing helps in achieving these
objectives," says Mehta.
With the companies’ management
realizing that their ideas will sell like hot cakes in the US capital markets,
the greed to raise money cannot be discounted. As R Ravi, VP, ICICI Securities
and Finance Company, says, "In a nutshell, make hay while the sun
shines." The brand value attached to being listed on the US capital
markets, given the stringent accounting and disclosure norms that the companies
have to follow, is also looked upon by the companies as a way of increasing
their valuations on the domestic bourses
we look at the global scenario, the picture becomes clearer on why the Indian
companies are the darlings of the US bourses. We find that globally IT services
are growing by around 15% every year and India’s contribution is still very
low. Thus, from the US investor perspective there is a massive potential for
Indian IT services or product companies to keep up the momentum of growth, which
they have achieved over the last five years. "In the US, IT companies have
a significant portion of revenues coming from products or product-related
companies. Hence, any massive technological change would make these companies
suddenly redundant. On the other hand, majority of Indian IT companies are into
services and they are not betting on any technology. Thus, US investors are
reducing exposure to US technology companies and reallocating funds toward
Indian technology companies," says Ravi. Over and above that, Indian
companies have earned a reputation for giving competitive advantage to their
customers.
Scarcity of valued companies
Valued
Indian technology companies that have been listed on the US bourses are scarce.
"Given the long-term temperament of Indian companies, US investors are
betting on these companies," opines Roddy Sale, Head, Investment Banking,
Jardine Fleming. A couple of other investment bankers, who preferred anonymity,
agreed with Sale’s opinion. According to them, the US market is comfortable
with the model being adopted by Indian companies. "The offshore model
followed by Indian companies is attractive. And with the scarcity of valued
Indian technology companies and the high growth stories of Indian companies, the
US markets are favoring these companies," says an investment banker. The
ability of the business model is hard to replicate and therefore, continues to
supplement an edge to their offerings. "This has led to the realization of
a great potential regarding the return on investments. Moreover, Indian
companies are giving international investors an opportunity to participate in
the Indian software success story. This definitely helps to establish
strong brand equity," says Mehta, explaining the rationale behind the
participation of the international investment community.
Companies in queue
following the US GAAP (generally accepted accounting principles) for the pastseven years. However, we have not taken any decision on the listing," says
Ashank Desai, CMD, Mastek. Bangalore-based BFL Software is also reportedly
planning to go for an ADR listing. According to sources, Satyam Computers will
be coming out with an ADR to liquidate debt or go for acquisitions. "We
have not finalized a tentative date for the proposed issue or the size of the
issue," says a spokesperson of Satyam Computers.
Chennai-based SSI, which made a
$100 million GDR, which was oversubscribed 16 times, is also planning to go for
an ADR listing at an appropriate time. "We chose the GDR route, because we
needed the funds pretty quick to develop infrastructure for setting up offshore
development centers near Chennai. As partners of Nasdaq by virtue of a 50:50 JV
with them for Indigo markets, we are committed to go for a Nasdaq listing,"
says a spokesperson of SSI. Chennai-based Dishnet, Sterling Infotech’s ISP
project, is planning a Nasdaq listing to raise $300 million and has appointed
investment bankers Jardine Fleming for its ADR issue. Industry sources are also
betting strongly on HCL Technologies taking the same route.
On a strong wicket
Interestingly,
any company that one speaks to has plans to tap the US market at one time or the
other. Seeing the success stories of Infosys and Satyam Infoway, every other IT
company is looking to raise money through the ADR route. Indian IT companies
with their diverse skill sets, logic and English-speaking work force possess a
big advantage. "Fundamentally, the Indian IT companies are on a strong
wicket as far as sourcing contracts from all parts of the globe are concerned.
These companies can ramp up manpower and the man-hour rates continue to be
competitive. Thus, fundamentally strong, all IT service companies are in a
position to produce revenue and net profit growth of 40%-70% every year over the
next five to 10 years," says Ravi. Other investment bankers and financial
analysts share his opinion. "Broadly speaking, US investors will continue
to invest in Indian IT companies for a considerable period of time. Though there
will be volatility in the market, Indian companies will continue to attract
investments," says Sale.
companies with a high price to earnings multiple have become darlings of the US
bourses. "Besides, the non-resident Indians are playing the markets in the
retail sector. This will continue as long as the scarcity continues,"
reveals an analyst with one of the investment bankers. Over and above that, the
corporations in the US, Canada, Europe, Latin America, South East Asia and
Central Asia have recognized that India is the place to outsource software.
"Competition from Eastern Europe and South East Asia are not a big threat
to strangulate the growth of IT services from India. The new dotcoms are likely
to outsource in larger quantities, since they have shorter time-to-market
portals and these sites will require constant upgradation. At this point of
time, the order flow seems to be perennial," says Ravi, explaining the
rationale behind the bullishness on Indian IT companies by American investors.
Another angle that has to be
looked into is related to the stock market performance of IT companies. Most of
the IT companies are trading at huge valuations and it is a matter of time
before correction takes place. "The correction rally is essential for
long-term prospects of the IT sector from a stock market point of view,"
says Ravi. Indeed, with the stock markets getting into the correction mode, it
is imperative that the correction be 25%-30%.
Management and brand image
More and
more small companies are making a beeline to tap the US markets. It is important
to consider the managements and brand images of such companies.
"Investors are going to be selective on what they pick and choose. The
company having a good brand image will sell well," says an investment
banker. Generally, smaller companies ideally would like to encash when markets
are looking good and when investors are lenient. But bigger companies do not
have to worry about the market. If their business models and fundamentals are
strong enough, they can do an ADR issue during tougher periods of the market.
"The right pricing, and not aggressive pricing, is absolutely essential for
a decent performance on the secondary markets," says an investment banker.
Another reason that Indian companies are targeting overseas listings is because
of the present guidelines of the Securities and Exchange Board of India (Sebi).
Indian companies seeking a listing on the domestic bourses mandatorily have to
offer at least 20% of equity to the public. Moreover, they should have at least
a three-year profitability track record. "In contrast, no such stipulation
is applicable for companies seeking overseas listings. This is primarily the
reason why Satyam Infoway made a direct listing on Nasdaq," says Mehta,
citing reasons for Indian companies going for overseas listings.
Words of caution
All said and
done, it is on the part of the investor to pick and choose and not blindly
follow market movements. If the management’s attitude is suspect, investors
should be vigilant and should not give a liberal premium. To a certain extent,
some of the lesser ethical managements raise money and siphon off funds from
allocation on construction projects, one off the time-tested ways of making
quick money. As Ravi says, "Let us not fall prey to the Greater Fool Theory
that is being advocated by the market."