With two long years of slowdown behind them, the Indian technology sector is now warming up to the upcoming market rebound. Cautious optimism has slowly given way to the good feel factor and both large and small companies are gearing up in their own different ways to be ready for the next boom. However, with the consolidation happening in the industry over the last two years, smaller companies will find it increasingly harder to grow and only those who have a very niche focus or have IP related revenue streams will find resources to divert for growth.
The fiscal 2004 has been, in all respects, much better than 2003 with both big and small companies improving topline and bottomline growth. The larger companies have seen better sales growth and to some extent improved profits. Smaller companies have been hit both by lower sales growth and lower margins as they face longer sales cycles and a limited entry to large accounts. Once the US technology markets make recovery and mid market companies start outsourcing, we believe that, given the better economies of scales, larger companies will be able to compete even on price with smaller companies and it will be only when the demand rises beyond the capacities of larger companies, will smaller companies see slight improvement in fortunes.
Unlike last year, M&A activity was somewhat subdued this year, thanks to the pre-occupation of big companies in customer acquisitions and recruitment. The acquisitions that happened were either to penetrate a new geography or a vertical where the company felt it was weak. Infosys acquired 100% equity of Expert Information Services Pty Ltd, Australia for approximately $22.9 mn. Similarly, Wipro acquired NerveWire-which operated in the financial services market for approximately $18.7 mn in cash. In other notable deals, i-flex Solutions acquired SuperSolutions, a US-based consumer lending software provider, in an all cash deal for $11.5 mn. iGate was among the most prolific acquirers with three companies in the back. It acquired Bangalore-based IdeaSpace Solutions for Rs 7.7 crores. The company also bought GMR Group’s 51% stake in Quintant Services, which offers BPO services, in a cash deal to augment the former’s domain expertise and thereby strengthening its presence in the financial services segment for Rs 87 crore. iGate also acquired the BPO related businesses of IT&T, a listed company for Rs 19
In an interesting development, Digital Globalsoft, which was a 51% subsidiary of HP, decided to de-list from Indian stock markets and an exit price was established at Rs 850 per share and HP had to put up Rs 1,418 crore to fully acquire Digital Globalsoft. A similar move by e-Serve, the Citigroup BPO company, is under process. Citigroup is set to acquire the outstanding shares of e-Serve International valued at Rs 550 crore and make it a fully owned subsidiary. The only remaining listed MNC software company in India, Hughes Software, had a change of parentage, as its 55% parent Hughes Corporation was acquired by Rupert Murdoch controlled News Corp. These have been acquired by
In overall terms, the M&A activity, though somewhat less prolific last fiscal, shows the ongoing trend of consolidation in the IT services markets as well as the increased focus on verticals. We believe this trend will continue into the current fiscal too, making Indian companies larger and more resilient to volatility and at the same time with a more vertically focused business operations with improved skill sets and more solid client referral lists.
The improving fortunes of the global technology sector and bullish conditions in the Indian bourses saw the BSE TeCK index moving northwards in tandem with both NASDAQ and BSE Sensex outperforming both. While NASDAQ moved up by 36% last fiscal and BSE moved up by 89%, the tech sector index BSE TeCK showed a 91% improvement over the year. The bullish sentiment remained strong from the commencement of the fiscal until around December 2003, when the growing concerns of the economic repercussions of the Iraq War and political uncertainty at home forced the indices to move southwards, though it maintained most of the gains during the year.
On a year-to-year basis, the total market capitalization of the 57 companies analyzed saw an increase of 38%. Among these, the top five companies in terms of market capitalization as on March 31, 2004 saw a rise of 24% over the previous year and the bottom five companies rising 12% in the same period. To reflect on the consolidation taking place in the Indian Technology Sector, the top five market capitalized companies formed 77% share of the total market capitalization of the 63 companies.
Our analysis has been made using a sample of 57 companies, which together had revenues of Rs 30,696 crore. The data used for this study was strictly based on the latest audited figures available from the companies. Consequently, a few companies whose fiscal year ended on March 31, 2004 was not available and hence figures from the previous year. Similarly, companies whose year ending is June 30, September 30 and December 31, the data used pertains to the previous year. Among the major companies, NIIT, which was restructured into the software and education entities, was not considered for rankings due to lack of prior year comparisons. 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-2003 and 2004-inter-company comparisons cannot be made.
This is the first time that we are taking consolidated figures as per the Indian Generally Accepted Accounting Principles (GAAP) of the companies.
While we are by and large satisfied with the rankings, that in some ways also reflect the changing fortunes of the individual companies, numbers often do not reflect the whole truth and therefore, there could be some aberrations in rankings due to it.
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 thus get only 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.
GROSS BLOCK GROWTH
Sushanto Mitra The author is the founder of Technology Capital Partners
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