The Indian Multinational

"Today, our IT Industry is proud that 260 of the Fortune 500 companies

are its clients. When we march towards a developed India, I would like the IT

Industry to lead the march by proclaiming that '260 of the Fortune 500

companies are Indian MNCs'. This is my dream," the President of India,

APJ Abdul Kalam said during his visit to the International Institute of

Information Technology. Can the Indian IT Inc meet his vision?

If TCS, the largest Indian IT company, continues to grow at around 32% CAGR,

(based on its past three years' revenues), by around 2011 to 2012 India might

have its first IT company in the elite Fortune 500 list. This, if one takes into

account the current entry barrier of $10.8 bn, which is the revenue of

Toronto-Dominion Bank, the 500th company in the 2004 global listing. If TCS'

growth trend continues in the similar vein, then it might be able to reach the

$11.2 bn mark by 2011 and $14.7 bn by 2012.

An extremely hypothetical assumption, considering that other companies in the

list will also be growing. Therefore, the entry-level barrier would also have

grown by the time TCS reaches the current mark. Nevertheless, it is a distinct

pointer to the fact that the Indian IT industry's Fortune 500 dream is still a

distant reality. However, there is no denying the fact that India IT Inc, at

least the top 5, is right on track-thinking bigger and getting bolder. And, if

we share Nasscom President Kiran Karnik's optimism, then we should be seeing

three to four Indian IT companies breaking into the Fortune 500 list within the

next decade.

The top five



The top five Indian IT companies based on FY04 revenues-TCS, Wipro,

Infosys, Satyam and HCL Technologies-are the prime contenders in the race to

the Fortune 500. While the first three have made it to the billion-dollar club,

the remaining two are already half way through to that mark. According to Karnik,

the way things are shaping up the companies that are most likely to make it are

going to be the ones from the current top 10 because the dip-offs in size are

sharp beyond the top 10. Experts feel that even within the top 10 the dip-offs

start getting sharper after the top three to five companies. As a result, the

likelihood is restricted to only the top five and, more specifically, to the top

three.

Worthy contenders



So, what makes the current three Indian biggies deserving contenders in the

Fortune 500 race? While revenues and market capitalization are the prime

factors, the important fact that these companies have truly donned a global

outlook and have also established global operations makes them the most worthy

contenders. As Infosys chief mentor NR Narayana Murthy once said, breaking into

the elite list of 'Fortune 500' companies is not about achieving revenues or

market capitalization but having a mindset of treating the entire globe as your

arena. Not surprisingly, Infosys was ranked ninth by PwC in the list of World's

Most Respected Companies in IT, sharing the list with the likes of HP, IBM,

Dell, Microsoft, Oracle, and Intel among others. Computer Business Review in

July '04 listed Infosys and TCS among the ten most influential companies in

offshore outsourcing-an indication that these companies are becoming truly

global in nature.

The top companies are indeed rapidly expanding their global outlook and

reach, setting up centers across the world and competing with the top tier

global IT companies. TCS is located across over 30 countries and serves clients

in around 60. The global locations for Infosys, Wipro and HCL Technologies range

between 10-20 countries. These companies serve some of the top clients globally

including the likes of GE, American Express, Ericsson, Ford, Transco,

Prudential, Deutsche Bank, and the Standard Chartered Bank. In the last two to

three years, these companies have also been open to foreign acquisitions and

JVs, to expand their global footprint. And the acquisition list is very long:

TCS acquired Phoenix Global Services (technology solution provider); Wipro

acquired Nervewire, a US-based financial services consultant and utilities'

practice of consultancy AMS; Infosys acquired Expert Information Services of

Australia and US-based Trade IQ product division of IQ Financial Systems, a

Deutsche Bank-owned outfit; HCL Tech has acquired majority stake in Aalayance, a

business integration firm with offices in San Jose, US.

Boiling down to the basics in terms of market capitalization, the top three

companies have a good going with their market value being almost comparable,

and, in some cases, even higher than some of the IT companies in the Fortune 500

list-despite the fact that they figure relatively much lower in revenue terms.

Going by the prices in the US bourses as of 31st March 2005, TCS at around $21

bn market cap (though TCS is not listed in the US, experts presume its US price

would be at around 40% premium to its underlying domestic price), Infosys at

$19.84 bn and Wipro at around $14.4 bn, boasted of a higher market cap than CSC's

market cap of $8.6 bn and EDS market cap of $10.7 bn. They also compared

favourably with Accenture's market cap of $23 bn. While EDS is ranked 232, CSC

is ranked 366, Accenture is ranked 460 in the 2004 Fortune 500 list. The high

valuations are an indication of the fact that the market today perceives TCS,

Wipro and Infosys as companies with good growth potential.

The top tier Indian companies are also doing well, even in terms of growth.

According to Karnik, not only are these companies big in terms of size but they

are also growing well and, in some cases, even faster than the industry growth.

"Inspite of their large base size, the companies have been able to maintain

a high growth momentum in the last three quarters and we do see it

continuing," he adds. All the top three companies have maintained over 30%

CAGR over the last three years.

Rules of the game



But, will this be enough for our top three to join the ranks of the likes of

Wal-Mart Stores, BP, Shell Group, Citigroup, General Motors, BMW, IBM, HP, etc.

While TCS, Wipro and Infosys may have crossed the psychological billion-dollar

barrier, achieving the next few billion dollars is going to be a tough task,

warranting a much more rapid growth. Karnik points out that along with organic

growth these companies will have to go in for acquisitions to be able to achieve

the required rapid growth. "The organic growth will continue to happen but

that is not going to be good enough for rapid growth. Acquisitions will help

these companies to add expertise in terms of both new markets and

technologies," he adds.

Though they have started making headway in the area of acquisitions, the top

tier companies are still conservative in their approach, generally restricting

to small to mid-sized deals (from a global perspective). They have not gone for

any big-ticket acquisitions, in spite of their high market capitalization. This

is completely opposed to the American culture, where companies are open to

acquiring other companies with market caps higher than theirs. It will, however,

take another few years for the Indian companies to get bolder on the

acquisitions front. According to Karnik, Indian companies are becoming a little

braver and in the next 3-4 years we might see some big-ticket acquisitions

happening. "Indian companies are well-positioned to do that as their

valuations and market caps are high. They can leverage it to raise money for

bigger acquisitions," he adds.

Apart from leveraging their market cap for acquisitions, experts also suggest

expanding of service lines and penetrating those new geographies that will

provide the scale of growth. With size and experience, the top tier Indian

companies are already moving into the Systems Integration area. They will need

to strengthen their focus on the SI business line as it will help them in

picking up the big deals. In terms of service lines, some of the other growth

areas include engineering design services, BPO etc as opposed to application

development work, till about a few years ago. In terms of geographies, Nasscom

identifies Japan and Europe as the really high growth markets in terms of top

lines for the companies.

Towards large-ticket deals



An entry into the Fortune 500 will signify the arrival of not only the

Indian IT industry but also the India Inc brand, as a whole, at the world arena.

Even though the Indian IT industry is already well established on the global

map, the top companies still face resistance in terms of getting the big

contracts. According to Karnik, many global companies see the size of the vendor

when they decide on large-sized deals. A case in point is the British National

Health Service deal. So, definitely, making the Fortune 500 grade will help a

vendor to vie aggressively for the large-ticket deals. The competition will also

increase, as the company would be competing head-on with the international

biggies. But rubbing shoulders with some of the topmost corporations will make

it easier to bag some big deals.

While the going seems smooth for the top tier Indian IT companies, there are

still issues that need to be resolved before the Indian IT industry makes its

presence felt in the Fortune 500. Some of these critical issues include

infrastructure costs, human resource availability and retaining profitability

against aggressive price competition from global majors and external dynamics

like rupee appreciation. Unless these basic issues are resolved, the Fortune 500

dream will remain just a dream.

Shipra Arora