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Visiting executives from the US and Europe often point out half matter-of-factly and half jealously that Indian companies have just seen one side of the storythe brighter, that is. You can call the Indian challenge real, only when these firms prove themselves in a downturn, they argue. And FY 08 gave Indian IT services firms a feel of this.

To be honest, a period of fluctuating exchange rates is not exactly a downturn; but then 25.7% growth is not a bad performance either. In fact, anywhere else in the world, in any industry, it would be considered an excellent performance. But then, as some Indian mystics would probably explain: everything in the world is relative.

And here we are talking of a year of relatively bad performance (it grew 39.9% in the previous year) amidst a relatively serious crisis of the rising rupee (the low-cost advantage of India, all the discussions shrugging it off notwithstanding, by far remains the reason for offshoring to India). The rupeewhose fluctuations even Oscar Wilde, through his repertoire of ready wit, had once found difficult to explainrose 11%. And to add to this, Q4 saw a fear of economic recession in the US hitting the business of IT services outsourcing to some extent.

It is a little odd, if not ironic, that an analysis of the performance of an industry that has almost single-handedly transformed the collective psyche of a nation of a billion people, starts with so much emphasis on an external factor like currency fluctuation. Honestly, we do not like it as well.

We are not saying it is the most # important factor for this industry in the long run. But the, DQ Top 20 is all about the years performance. And the biggest story last year for this sectorIT services exportsis that of the rising rupee.

Share of the Top 20 exporters dropped, reversing a trend of many years

Consider this. Just compare this growth (the rupee growth) to the dollar growth. You do not need further convincing. While the industry grew 25.7% in rupee terms, it was 40.2% in dollar terms. TCS, the top exporter, which grew 27.6% in rupee terms grew 42.3% in dollar terms. Infosys, which recorded the lowest growth among the top ten exporters, grew a respectable 33% in dollar terms.

Then, what is the big deal? It is the fact that these companies spend largely in rupees. So a rising rupee affects two metricsthe operating margin as a percentage of revenue, which is a measure of the companys efficiency; and the net profit in absolute terms, which is accrued to the company as cash, and which goes into expansion, salaries, and other expenditure.

What is admirable is that most of the large IT services firms in India have managed to maintain their operating margins. Though, absolute net margin growth in rupee terms has slowed down. This achievement of maintaining the operating margin amidst an 11% rise in the local currency cannot be downplayed. And it looks even more commendable viewed in light that it has not come by some magic formula.

While we have not been able to estimate the exact break-up of the rest of the world revenue, because different companies define it differently, it is heavily Japan, Australia, Singapore, and the Middle East. Indias revenue has not been taken into account here

Take Infosys, which has registered the slowest top line growth among top export firms. It managed to maintain the operating margin by increasing its per employee revenue by close to 5%. And 5% in a single year is not a piece of statistics you can just flip through. How has it done this? By improving on all fronts. It managed to increase rates, both from existing clients and new clients; it changed its services mix, with systems integration/consulting now contributing a higher percentage to its revenue; increased the offshore component in the services segment; and finally even reduced overheads through scale benefits.

Most large companies have delivered on the operating margins. And absolute net margin growths, which often move stock prices in India, in business terms, matter little for the IT services firms that are sitting on piles of cash. So, whatever it has done to the stock prices of these firms notwithstanding, FY 08 has been a year in which the resilience of this industry was tested. On many measures, they have actually delivered better than the previous year.

As we said in the beginning, everything is relative.

By the Numbers
The IT services exports from India grew 25.7% in FY 08 to reach Rs 132,878 crore, up from the previous years Rs 105,684 crore (revised). In dollar terms, its size stood at $32.9 bn, up 39.9% from FY 07s exports of $23.5 bn. This does not include BPO revenue but includes all other areas: products, outsourced product development, engineering services, and consulting.

The Top 20 exporters too grew at the same rate, 25.8%, and clocking a combined revenue of Rs 101,218 crore ($25 bn), or 76% of the total IT export revenue from India.

For the first time in many years, the Top 20 exporters have grown at the same rate as the industry. In FY 07, for example, while the exports industry grew close to 38% (revised), the Top 20 had grown more than 44%. Correspondingly, their share of the pie was also bigger at 77%.

This year the combined revenue of the Top 20 exporters is 24.4%, higher than the combined revenue of Top 20 exporters in FY 07. Though this is lower than the industry growth rate (25.7%).

The DQ Exports Top 20 is a fairly heterogeneous club. Purely for statistical importance, there are twelve Indian companies and eight non-Indian companies. But when you consider that two of these Indian companies, i-flex and MphasiS, are owned by American parents, the picture looks even more balanced.

Also, there is just one captive development operation, Oracle, in the top 20 exporters list, while IBMs exports are a mix of its global services delivered out of India and development of its portfolio of software products in India. Except for these two, others are pure services firms.

The New Order
We have often been appreciated and criticized for putting all types of exportersthe in-house development operations of companies like Oracle, Microsoft, and SAP; the global delivery facilities of non-Indian companies like IBM, HP, Accenture, and CSC; and Indian companies like TCS, Infosys, and Wiproalongside each other.

We like the appreciation, because this is what DQ Top 20s guiding philosophy is. It is a very holistic view of the industry that we take once in a year. And hence, to exclude the software development work of companies like Oracle and Microsoft would mean not capturing an entire aspect of Indias global importance.

But we also respect criticism because we understand the earnestness with which some companies do criticize. Most of these criticisms are not about including the revenue accrued to India out of software development by ISVs in the overall exports revenue. But also about comparison of Indian companies with them, or even with non-Indian companies that have delivery operations.

To address this, what a few call comparison of apple to oranges, we have drawn out an extensive list of 50 Indian IT services firms that we believe provide a fair basis of comparison. But the objective of the new list, called the Desi Brigade, is more than just revenue and growth comparison. It is far more elaborate. For one, it is the first such list that exists anywhere in the public domain. Just the listwith revenue and growth figurespresents a far better picture of the Indian IT services industry than the detailed analysis of a few top-rung players. But more than this, it also allows us to explain how slowly but steadily, a new order is emerging within the Indian IT services industry, while we slept, to borrow a phrase from Tom Friedman.

Most of the discussion so farincluding our analysis in DQ Top 20 last yearhas been about how some of the Indian companies like TCS, Infosys, and Wipro, today are positioned alongside IBM and Accenture as the new leaders in global outsourcing. Leaving behind some of the far larger and older companies that have been slower to react to the new reality.

What about the next rung of companies, especially in India where the growth is happening? As the larger companies continued to strengthen their hold over the industry, the discussion was somehow never picked up seriously. If anything, analysts kept dismissing them saying that the gap between tier-1 and tier-2 is increasing and were concentrated on studying the top few companies in depth.

This was till last year. FY 08 has put a brake on the trend of the big getting bigger. Only time will tell whether this is a one-year aberration or a reversal of the trend. But this surely challenges the analysts wisdom that a tougher time will spell doom for smaller companies, while the bigger companies will manage to escape. FY 08 was a relatively tougher yearprobably the toughest since FY 01. But the smaller players have actually proved their resilience better.

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