It was too good to be true. The dream run of the Indian IT sector seemed to defy the law of gravity, as much in India as in the rest of the world. Then things changed. From its peak of 4,500, the Nasdaq starting falling rapidly, sending shivers across the world. What began as a slowdown in the dot-com world soon spread up the supply chain into consulting companies, software and hardware companies in the US gradually seeping into India and now in Europe and the rest of Asia as well. At the end of the fiscal, everyone was praying that the bottom had reached.

While last year, everyone in the industry was talking ESOPs worth millions of dollars and jumping from one salary hike to another, this year, pink slips were more in fashion for many Indian IT professionals here as well as overseas. Led by the dot-com debacle, IT companies have been cutting staff to remain profitable. This is the case even in India where layoffs were relatively uncommon.

While companies had been reporting over 100% growth in sales and profits, quarterly profit warnings have now become the norm across the Indian IT firmament. And for investors, of course, the news could not have been worse. The frantic fund-raising activities of software companies also slowed down with a number of companies deciding to stay away from the markets. At the same time, the bigger companies continued to reach out to global capital markets by listing their shares on the Nasdaq and NYSE. Satyam, Aptech and Silverline raised monies from ADR issues and some of them also acquired companies that are increasingly available at bargain prices. SSI, the most prolific acquirer took over four companies—Inndsoft Systekh, Ablon Orion, 3rd Agenda and Indigo International—during the year. Even mid-sized companies like Infotech Enterprises, Melstar and Compudyne Winfosys made acquisitions. Given the high level of cash that some of the majors like Wipro, Infosys and HCL Technologies have in their coffers, we expect some major acquisitions from them as the market touches the bottom. Indian entrepreneurs are still getting used to mergers and acquisitions. Among the few domestic M&A that clicked, the notable ones were Ajax Software by ICICI Infotech and Thermax Software by Global Tele Systems. As reality strikes, there is bound to be some consolidation among mid-sized companies in the domestic markets, leading to a mature IT sector in the coming years.

The domestic stock markets moved almost in tandem with the Nasdaq—the barometer of the global technology sector, falling from the 5,000’s to 3,000’s during the year, the downfall being led by the tech sector. Of the 54 IT companies for whom stock data is available, the average fall has been over 70% while DSI-10, which stood at 2,626 at the beginning of the year eased to just 837 losing over 68% reflecting the overall IT sector slowdown. While the Nasdaq meltdown has contributed significantly to the slowdown, the role of the speculators and market operators in the total investor disinterest in the technology sector cannot be condoned. Like last year, a number of companies converted themselves into software companies attracting investment from reputed financial institutions. This worked towards image boosting and successfully attracted retail investors.

The coming year brings a host of challenges as well as opportunities for the IT sector and investors. Clearly, it is the top rung players who have maintained their growth rates and investment. It has become imperative for investors to verify the credentials of a company before they take the plunge. As the markets touch the bottom, it is time to accumulate high quality IT stocks at bargain prices.

The DQ analysis is based on latest audited data from 54 companies, with collective revenues of Rs 14,703 crore. Certain companies that had a March 31 fiscal year end were unable to provide audited reports. Similarly, for companies with year endings of June 30 and September 30, the data used pertains to the previous year.

The authenticity of all data is assured by the fact that all the data is audited. However, given the fact that the data pertains to different years—2000 and 2001—inter-company comparisons cannot be made nor does this data reflect the current performance of the company. The analysis does not take into account the associated or group companies as these are yet to be incorporated in accounting figures under Indian laws. Therefore, companies like Mastek, Silverline Technologies, HCL Technologies and NIIT that have a large proportion of operations from subsidiaries would have been ranked differently. Moreover, some companies restructured their operations during the year, which included selling or hiving off a part of the business. The past performances of such companies have been ignored, as that would have resulted in a different ranking. Such companies include Sonata Software, PentaMedia Graphics and Mascot Systems.

Finally, numbers by themselves do not tell a complete story. Only a deeper analysis of the company behind these numbers can provide an accurate picture. Consequently, there are companies in these lists whose performances in the past or even in the current year were excellent in terms of accounting numbers but do not qualify for applause. These are, of course, the vagaries that any analysis purely based on numbers can provide.

Sales

Sales is perhaps the most important criterion for determining the strength of a company as we move into a polarized IT world where market share is supreme. A proof of this polarization is that the top tne companies have almost 71% of the total revenues, compared to 75% last year whereas the bottom ten constituted a meager 1% of overall revenues. This dampening of polarization is also due to the entry of companies that had just completed their initial public offers were able to show significant sales during the year. Besides, few companies have changed their ranking in a significant way over the previous period. This also reiterates the importance of size in the IT sector.

Profits

While sales may be the most important factor in the market place, in terms of meeting the objectives of the shareholders, profits are sacred. Here too, the trend has been toward consolidation. The top 10 companies have provided 78% contribution to the total net profits of the sample improving it from 76% last year. At the same time, the bottom 10 contributed only 0.21% of the total profits. The only hardware company to make it to the top 10 is Moser Baer.

Gross block

The Indian information sector has been a resource-starved sector and serious investment in fixed assets such as infrastructure has been made only in recent years. This too has largely been funded by retained profits.

More recently, some companies—most of them in software services—have grown by tapping the capital markets in India and abroad. Six companies raised funds through GDR and ADR issues. The level of investment by the bottom 10 companies was, however, limited to just 1% of the total, thus pointing to the limited investments made by the smaller companies due to lack of funding.

Page(s)   1  2