Survival of the Biggest

In adversity, remember to keep an even mind. Adversity
reveals genius, prosperity conceals it. Adversity has the effect of eliciting
talents, which, in prosperous circumstances, would have lain dormant

–Horace, in The Book of Positive Quotations

WHEN INDIAN IT entered financial 2001-02, it was with the dread of impending
gloom–everyone knew that the party was over and the year ahead would be tough.
But no one was quite prepared for the severity of the hangover, or its stubborn
refusal to go away. When the year finally ended, the slowdown still hadn’t,
and nor were the signs on when it would anything to swear by–but the tough
year had seen IT’s toughest realign businesses and target geographies to
emerge stronger. But despite the strategies and the belt-tightening, the DQ Top
20 grew at a slower rate (13%) than the average industry growth rate of 14%–the
first time ever that the exclusive club lagged behind overall numbers. The
guilty party here–those top rankers who operate in the domestic market, which
showed negative growth for the first time in fiscal 2001-02. The new DQ Top 20
closed the year with Rs 30,990 crore in total revenues, Rs 4,821 crore more than
the Rs 26,169 crore notched up by last year’s club. There were two big
differences in the Top 20 this time–apart from showing lower than industry
average growth, this was the first time that four in the list showed negative
growth, with red ink running across their balance sheets.

Snapshot Top 20 Club
	Industry growth with ITeS: 14% Industry growth without ITeS: 9% Top 20 growth with ITeS: 49.87% Top 20 growth without ITeS: 56.3%
	With revenues of Rs 4,187 crore and a growth rate of 33%, TCS–India’s (as also Asia’s) largest software exporter–led the DQ Top 20 rankings chart
	Four of the Top 5 players of the previous year hung on to their positions, with only distribution giant yielding its fifth rank (2000-01) to IBM India
	Hardware manufacturing exports was the hot ‘item’ of fiscal 2001-02, and this segment had two Top 20 representatives this year–Celetron and Moser Baer
	Global tech-led slowdown, 9.11, 12.13 and war threats were too much for the IT sector to ward off–billing rates were hit, and growth rates crashed
	2001-02 marked the first instance when the combined revenue growth of the Top 20 companies was slower (13%) than that of the overall IT industry (14%)
	Training was the worst-hit segment–while top gun NIIT saw revenues slide by 34%, others were hit equallly badly. Aptech fell out of the DQ Top 20 list
	The western region led in terms of IT spend, followed by north and south, with east coming in last. But all four regions ended the year with lower IT spend

Those on the new list, however, did justify their rankings–despite
the negative growth shown by some. Nearly all performed better than the
competition in their segments; a majority spent the slow year consolidating
positions, either by entering newer geographies or redefining business models;
nearly everyone used hitherto dormant cash reserves to push acquisitions and
inorganic growth, with some even buying each other out. Most finished the year
with their paintwork intact, and the sum of their revenues was a near-perfect
50% of overall industry size–Rs 30,990 crore out of Rs 62,134 crore.

And since the slowdown had started before the beginning of
financial 2001-02, most had their strategies ready to counter it, with their
moves mirroring those in the last quarter (JFM) of 2000-01–quick planning and
quicker execution, spirited offshore development and tapping of business
opportunities, consolidation and overhaul of business models, and the targeting
of Europe, Asia-Pacific and other markets as new destinations. Despite the last,
the US remained King in terms of Indian IT exports–in fact, it increased to
64% this year in fiscal 2000-01–but there were others knocking at the palace
gates. And despite the focus on offshore, the bigger guns saw a pressure to go
onsite, but with far lower billing rates–toplines soared, profits turned wafer
thin.

While the driving chant was still one of bigger players
getting bigger and their share of the overall pie increasing, the particularly
bad year that the hardware, training and overall domestic market had, dictated
the final structure of the new Top 20–Aptech, Microsoft India, Pentasoft
Technologies and Cognizant Technology Solutions fell out of the listings; Intel
Asia, Silverline Technologies, Patni Computer Systems and Moser Baer India moved
in to fill the vacant slots.

Flight to scale

Proving their staying power, all but one of the Top 5 hung on to their
rankings–it was only Tech Pacific that yielded and fell from #5 last year to
#7 this time around, with its revenues showing 3% negative growth to Rs 1,676
crore. IBM India, with revenues of Rs 1,778 crore, moved up one notch to fill
the vacancy. Others who made up the exclusive Top 5 list were near-foregone
conclusions–Tata Consultancy Services with Rs 4,187 crore, Wipro with Rs 3,179
crore, Infosys Technologies with Rs 2,604 crore, and Compaq Computers with Rs
1,790 crore. This will be Compaq’s last year in the rankings, following its
worldwide merger with Hewlett Packard. Among the top five, it was TCS and
Infosys that defied the industry-wide HR trend of controlling manpower numbers,
as both embarked on a recruitment binge. Clearly, Nasscom’s prediction of ‘Flight
to Scale’–customers flying to the ones who have the size and scalability–had
found its mark.

EXPORTS SAVE THE DAY: As Top 20 players in the domestic space showed negative growth, it was software exports that helped Indian IT’s finest–the DQ Top 20–finish with 13% overall growth

But there were those like Moser Baer India’s Deepak Puri
who had their own plans for growth and expansion. In the ‘Year of Survival’,
Puri’s optical disk manufacturing and exporting company showed an over-100%
growth rate. The growing media market no doubt helped, but the strong
performance also stemmed from Moser Baer’s strong R&D thrust. The company
ploughed in over 2.5% of revenues (Rs 15-17 crore) into R&D and engineering
work. Among the many feathers in its R&D cap was the development of the
proprietary process PC12D XT, which helped it slash manufacturing costs by
10-15%. This process also saw the company complete its capacity expansion
program in record time and below project cost. With the same initial budget, the
company now intends to ramp up capacity to a billion units.

Moser Baer’s performance also signalled the growing stature
of hardware manufacturing exports–it was the second company in this space (the
other being Celetron) to figure in this year’s Top 20 list.

GROWTH DRIVERS: It was the sharp fall seen by packaged software, networking and systems that hit overall numbers

Cautious, careful, fearful...

The year began on a numbing note–Infosys Technologies, considered by most
as a benchmark for ascertaining Indian IT’s health, issued a profit warning–it
forecast a growth rate of just 30% for fiscal 2001-2002, moments after declaring
a spectacular 115% growth rate for 2000-01. The announcement took a terrible
toll both on business outlook and sentiment, as also on the stock market
performance of India’s IT stocks. Everyone complained and criticized the
pessimism, and scrips nosedived to new lows, which they are yet to recover from.
In the final essay, Infosys was proven right, as were a batallion of others who
relooked their own numbers after the announcement of March 31, 2001. That last
day of the previous financial was the day that the slowdown really began in
India... and within weeks, Indian industry was forced to learn to live with it.

The country’s, nay Asia’s, largest software exporter– Tata
Consultancy Services–began the year silencing those who had predicted tough
times for it, given its sheer size. It was this same massive size that worked
the numbers for it–revenues for 2001-02 jumped to Rs 4,187 crore, giving it
the edge as India’s largest software exporter, and the DQ Top 20 No 1 ranking
in the companies’ list. Sure, TCS’ growth rate of 33% was lower than its own
55% showing in the pevious year, but given the industry average, it was a very
healthy performance.

LOSING THE SHEEN: Even though Top 20 revenues added up to a high 50% of overall industry numbers–Rs 30,990 crore out of Rs 62,134 crore–their rate of growth crashed. The negative growth shown by domestic players pulled down Top 20 performance

However, growth for the IT exports community came at a price–a
significant fall in billing rates. The beginning of the slowdown had seen Indian
software exporters getting price-point aggressive, taking a hit on margins. The
well-entrenched meltdown ensured that as customers went into multiple rounds of
negotiations, deals closed on price more often than not. A significant component
of onsite maintenance and support activity, coupled with more customers wanting
development to be done onsite, in response to events such as 9.11, explains the
increase in onsite revenues. While it helped revenues climb at a respectable
rate, it saw margins dropping through the floor. Despite the pressure, 2001-02
was the year that some of the largest deals were signed–TCS signed a
£30-million deal with UK’s United Utilities Water and a $15-million deal with
Racal Instruments. Its biggest story of the year–a $100-million deal with GE–the
largest deal in the Indian IT services history.

SEQUENTIAL GROWTH: Indian IT exports showed consistency through fiscal 2001-02, , but remained flat. The Jan-March quarter–tradtionally the strongest–was the slowest

Domestic faceoff: Blow hot, blow cold

In the domestic market, hardware–the mainstay of the previous year–took
a pasting, leading to the overall domestic market size falling for the first
time, ever. It was HCL Infosystems that made news in the desktops space,
regaining the number one position from Compaq. There was no radical strategy
here, but given the slowdown, HCL’s huge reach of 1,000-plus resellers and
aggressive targeting of ‘B’ & ‘C’ class cities did the trick. It
maintained a dominant lead in the small business segment and notched up gains in
the government, banking and insurance segments. The year marked a strong push by
HCL Insys to position itself as a technology company, the first to introduce new
products–it was the first to launch and ship P-4 PCs under the Rs 40,000-price
barrier, simultaneous with the global P4 launch. Compaq India, apart from losing
the PC crown to HCL Insys by a whisker, shone. It made it to the Top 5 infotech
groups of India again, and outperformed its global and Asia growth in almost
every category. It led in most server segments as well–something of a final
hurrah–following its mega-merger with HP. The new force threatens to rewrite
hardware rankings in the ongoing year.

MIXED BAG: Banking remained the hottest vertical for the second year running, but similar to the manufacturing space, it slowed down. In a year of sluggish domestic sales, only the telecom sector showed a substantial increase in IT spend

Among the ‘Big Three’ in the distributing business, it
was only Ingram Micro that adapted and managed to end the year with healthy
growth numbers (31%)–while top honcho Tech Pacific showed negative growth,
Redington India just about got away with flat growth numbers. The mantra at
Ingram was "growth with consolidation"–growth it achieved in
extremely good numbers, while the consolidation happened with the addition of
new product lines, including mobile phones. And an exclusive agreement with
Samsung saw it rake in Rs 70 crore worth of business in the first year.

NO SURPRISES: The western region led in IT spend again, followed by south and north, with east coming in last. However, across the board, the percentage share of all regions dipped, given the slowing domestic market and faster exports

Among those that saw negative growth, it was NIIT that was
the worst hit–it reported its worst performance ever, as the slowdown and the
absolute lack of general interest in IT courses saw numbers tumble. What made
the year particularly forgettable for the training giant was that it came on the
back of two years of spectacular performance, and Rs 1,000-crore plus revenues.
To drive the final nail in, the reversal came in the year that NIIT completed
two decades of existence. But stuck to its task it did, and consolidation was
the flavor of the season–it floated new companies, bought out some others, and
spread its product portfolio across newer geographies. In the final count, NIIT
closed its books with revenues of Rs 907 crore (Rs 1,375 crore in 2000-01). The
other training major, Aptech, had a torrid time and fell out of the Top 20
rankings–wilting under the double whammy of the slowdown and its demerger.

Manufacturing, BFSI, telecom and govt

A quick word on banking, financial services and insurance (BFSI)–which
remained the hottest growth driver with 14% of all IT sales in the domestic
market. Throw in manufacturing, government and telecom to this list, and you
have a quick one, two, three, four of who has been driving Indian IT in these
tough times. In the foreseeable future, this equation will remain unchanged.

TEAM DQ