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On The Nasdaq Trail

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DQI Bureau
New Update

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

publive-imageAcquisitions

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 publive-imageWhen

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 past

seven 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. Another feature is that Indian

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."

RAJESH

MENON

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