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Gr8 year for IT in India
In 2006, Indian IT sector clearly established that there was only
one way: up, with high double-digit growth. An estimated $40
billion revenue with over 30 per cent growth, 2006 was another
gaga year for the Indian ICT (information, communication and
technology) segments. While promising growth was registered in all
the tech segments, including hardware, software, and services,
contribution of the domestic market – about 50 per cent of the
total revenues – was a major welcome development in an industry
that has hitherto been mostly dependent on software exports.
According to a survey by Dataquest magazine, the top five IT
companies – Tata, Wipro, Infosys, HP, and HCL – grew by nearly 35
per cent. They also jointly hold one-third of the total market.The
trends, in fact depict, the contribution of technology toward
India’s economic reconstruction. The industry’s contribution to
the GDP of the country has risen from a mere 1.2 percent during
the year 1999-2000 to approximately 4.8 per cent during 2005-2006.
As the industry prepares itself for even better times in 2007,
here’s encapsulating the high points of the Indian IT in 2006.
Software: Success
saga continues:
Strong demand over the past few years has placed India amongst the
fastest-growing IT markets in the Asia-Pacific region. The Indian
software and ITES industry has grown at a compound annual growth
rate (CAGR) of 28 per cent during the past five years. The
industry’s contribution to the national GDP has already risen to
well over four per cent. The software and ITES exports from India
grew from $ 12.9 billion in the year 2003-04 to $ 17.7 billion in
2004-05. The total software and ITES exports from India are
estimated at $ 23.4 billion during the year 2005-06. Software and
services exports have grown at 32 per cent in dollar terms during
the year 2005-06. While BPO is a relatively smaller segment that
has been providing significant prop to IT exports, BPO companies
are already serving most major Fortune 500 companies. Even as
outsourcing firms are starting to foray into high-end services, IT
infrastructure management players are handling global networks of
major international corporations. Indian IT’s globalization drive
is significant for training companies like NIIT and Aptech which
have strengthened their presence in bastions like the Chinese and
US markets.
IT companies peddle India tag to gain global
footprint
India Inc is
becoming a global trend-setter inspiring foreign majors to emulate
desi success stories. And a set of smart IT companies are using
the India story to create a global footprint for themselves.
Infosys’ Finacle division, for example, cites the reference of
ICICI Bank while making sales presentation for its core banking
solutions to banks in Europe and Africa. Nucleus Software, on the
other, regularly cites its software installation for the SBI.
Telecom system integrator ORG Informatics explains its role in the
growth story Airtel and Reliance Infocomm to the prospective
telecom customers in Africa. Workflow and document management
software maker Newgen Software , which began by selling its
software to banks and insurance companies like Citibank India, Max
NewYork Life and ICICI Bank is now using the former’s references
to target their counterparts in Africa, Middle-East and now
Europe. “Big Indian banks and insurance companies are pretty
well-known worldover among their peers. And the fact that many of
these Indian FIs are our customers gives a lot of assurance to our
foreign prospective clients,” says Diwakar Nigam, Managing
Director, Newgen SoftwareTechnologies. “The ICICI Bank now runs
the world’s biggest banking sites and banks all over the world
want to emulate that. And when we tell them that Finacle made it
possible, it becomes our biggest advertising,” says Merwin
Fernandes, Vice-President, Business Head, Finacle, Infosys
Technologies. Infact, the ICICI story is now so powerful that its
Managing Director and CEO, Mr K V Kamath now addresses bankers
outside India at the behest of Infosys. Ditto with its smaller
competitor —Nucleus Software, which specialises in specific
banking modules such as cash management or loan management. “The
fact that the SBI — India’s biggest bank, successfully runs our
cash management solution is a big story for foreign clients, which
doesn’t know about us,” says Niraj Vedwa, Head Global Sales &
Marketing, Nucleus Software Exports.
IT firms set to
log robust Q2 growth
The results
season is back and this time, it is not just the fluctuating rupee
or the employee additions which will hog the limelight when tech
companies announce their second quarter performance. The IT sector
which has consistently posted over 30% topline (annualised) growth
in the last few quarters, could come up with even higher revenue
growth for the second quarter (ended acquisition story of biggies
like TCS and Wipro have been well publicised, it is the small and
mid-sized companies which could spring surprises in the coming
days. Typically, it takes at least 3-4 quarters for companies to
realise the benefits of acquisition but the fact that the Indian
tech sector began its overseas shopping in 2005 is what makes the
current results season exciting. As Sudip Nandy, chief strategy
officer of Wipro, the man who has scripted many of Wipro’s recent
takeovers, said, “Most acquisitions have a gestation period of
three-four quarters to make 2+2=5. While the first two (of
acquirer) comes in quickly, it is the other two which takes a
while due to integration.” Wipro, on its part, is all set to enjoy
the fruits of its last year’s acquisitions. In December 2005,
Wipro acquired two companies — New Logic and mPower — which have a
combined topline of $32 mn (around Rs 147 crore). One of the
latest entrants to the bourses, Sasken, has just completed the
process of acquiring Botnia Hightech Oy, Finland, acquired in
August last year. The takeover carried a price tag of euro 35.5
million. A source at Sasken confirmed that it would top up the
revenue for the company when Q2 results are announced. Product
companies like i-flex and Subex have been active with acquisitions
too. The Bangalore-based Subex Systems made one of the biggest
acquisitions in the IT industry when it acquired UK-based telecom
products company Azure Solutions for $140 m (Rs 630 crore) in a
cash-cum-stock deal. This is going to reflect in our consolidated
financial statement for the second quarter. For now, I can only
say that the integration of both the companies are going on
smoothly,” said Subhash Menon, CEO of Subex Azure. All of this
could well be the beginning of a future higher revenue growth for
the IT sector in general. As Nandy said, takeovers are likely to
push up the topline growth by 5-10 % which means we are in for an
average industry topline growth of over 40% in 2007, as a number
of small and mid-sized companies got into the takeover act in
2006. For companies like i-flex solutions and iGate Solutions,
their acquisition impact would be felt in the next two quarters.
China no threat
to desi IT model: Infy
Infosys
Technologies, which is a contender to break into Nasdaq-100 by
year-end based on its market capitalisation, doesn’t believe that
China would prove to be a threat to the scores on two fronts:
wage and project management skills. Chinese wage levels are higher
than India by 20%. China, Infosys officials say, also lacks much
of project management skills which are critical in
execution.Infosys, which like many of its peers, has set up
operations in China and expects business rampup. The Chinese
operations are critical not just for penetrating into the domestic
market but are being positioned to address opportunities in the
Far-East, notably Japan. At an analyst call after this fiscal’s Q1
results, the company’s CFO Mr V Balakrishnan had said that Infosys
China as well as Infosys Consulting were in the investment phase.
Infosys China had a topline of Rs three crore with a net loss of
Rs two crore. In the interim, India’s second biggest IT exporter
is betting heavily on UK, a market which it believes would grow
much faster than the company’s average growth rate. Revenue from
Europe is reportedly growing at 55% to 60% year-on-year. But while
growth in the UK is robust, the company says adoption in
continental Europe — and more importantly Japan — is still patchy,
though increasing. While the company doesn’t give country-wise
revenues, it would be pertinent to mention here that share of
revenue contribution from continental Europe has been on the rise.
In the first quarter ended June 30, 2006, Europe accounted for
26.2% of revenues compared to 25.5% for the fourth quarter ended
March 31, 2006. The figure for Q1 of FY’06 was 23.9%. According to
Mr S D Shibulal, founder director and head of worldwide customer
sales & delivery, Infosys’ growth in Q1 of the current fiscal was
driven by verticals like telecom, financial services and
manufacturing services. Infosys, which has a market capitalisation
of over $25 billion, is currently ranked 98 among Nasdaq-100 and
would be a strong contender for qualifying into Nasdaq-100.
Infosys had qualified to enter Nasdaq’s global select market tier.
IT cos stock up
on goodies abroad
Indian IT companies are taking on the world. The number of
outbound deals in the IT sector has doubled since last year and is
in fact higher than the inbound deals. While the inbound deals
this year is worth $784 m, the total outbound deals this year is
worth $802 m. Experts say this trend, which is testimony to Indian
IT companies coming of age, is only going to increase over the
next two years. “Indian IT companies are keen on making
acquisitions abroad and this trend has intensified over the last
few months and the greater share of outbound deals is a testimony
to that,” said CG Srividya, senior manager (corporate advisory
services), Grant Thornton. The total deal value in the sector has
also risen to $1.7 bn from $1.33 bn in the whole of ‘05. While the
outbound deals have doubled since last year, inbound deals (where
international companies acquire Indian companies) has actually
declined. The total deal value for inbound deals for ‘06 is $784 m
compared with $852 m for ‘05. Experts say this trend, which is
true for both software companies and BPOs, is due to the fact that
all major IT companies in the world have their centres in India
and would expand their captive units rather than acquire an Indian
company. “Outbound will continue to strip inbound for IT as major
IT companies in the world will invest in their own captive units
and look at only a few companies with tremendous potential,” said
an analyst. Some of the major acquisitions by Indian companies
this year include the acquisition of Azure Solutions by Subex
Systems for $140 m, $125 m acquisition of Minacs Woldwide by the
Aditya Birla group and Wipro Technologies’s purchase of Enabler
for $53 m. “Apart from building global delivery models, IT
companies are acquiring companies in other geographies as it the
best way to augment domain specific expertise and human
resources,” said a senior analyst at Prabhudas Liladhar.In fact,
this trend is likely to be even more pronounced for verticals like
financial services, remote infrastructure management and
infrastructure. Experts feel that mid-cap companies will
contribute more to outbound deals over the next one-two years.
“The Subex deal proves that the outbound deals are not just the
domain of large IT companies. To acquire new skill sets and to
gain greater access to other markets, more and more mid-cap
companies will explore this route,” said Nasscom vice-president
Sunil Mehta. According to the report, the average deal size of
outbound deals has also doubled from $10 m last year to $24 m this
year. Even the domestic deals (Indian companies picking up stakes
in Indian companies) has shown a spectacular rise. While the total
deal value of domestic deals was $80 m, this year it has risen to
$150 m. |
