Indian IT minnows can now swallow whales

MUMBAI: If there was any doubt about Indian IT companies truly arriving on the global scene, this piece of statistic should settle it once and for all. Of the top five IT services companies in the world ranked by market capitalisation, three are Indian companies.

Surprised? Don’t be. The market capitalisation, which is the number of outstanding shares multiplied by their price, of Indian companies like Tata Consultancy Services, Infosys Technologies and Wipro Ltd is just below that of multinational behemoths IBM and Accenture.

TCS, with a turnover of $1.84 billion, has, as on December 30, 2005, a market capitalisation of $18.14 billion; Infosys with a turnover of $1.57 billion, has a market capitalisation of $18.13 billion; while Wipro Ltd, with a turnover of $1.6 billion, had a market capitalisation of $14.53 billion.

Between December 30, 2004, and December 30, 2005, the market capitalisation of these three Indian companies went up by 29.5%, 42.6% and 20.1 % respectively.

The Indian trio are behind IBM and Accenture who, with annual revenues of $96.29 billion and $17.09 billion, had market capitalisation figures of $129.83 billion and $24.82 billion, respectively. On an annualised basis the market capitalisation of IBM dipped 20% while that of Accenture went up by a mere 1.9%.

In revenue terms, multinational companies like EDS (Electronic Data Systems) and Computer Sciences Corporation (CSC) are three to four times bigger than Infosys, TCS and Wipro put together. In market-cap terms, the three together are four to times as big as EDS or CSC.

Since market-cap is currency that can be used for takeovers, theoretically this means that any one of the Indian Big Three can buy one of these rivals for cash or share swaps anytime and become 10 times their current size.

EDS had annual revenues of $20.669 billion, while CSC had revenues of $14.05 billion, but the market capitalisation of these two companies was lesser than their revenues. EDS has a market capitalisation of $12.53 billion as on December 30, 2005, down 3% since December, 2004, and CSC had a market capitalisation of $9.36 billion, up 2% since the same period last year.

The fact that the markets are rewarding Indian companies more than their multinational peers can be gauged by the new research methodology called Relative Value of Growth (RVG). The RVG metric suggests that Indian IT companies like Infosys, Wipro, Satyam Computer Services and Tata Consultancy Services could eventually lead on a global basis and usurp the positions of global giants like EDS, Computer Sciences Corp, Accenture and BearingPoint.

The new research, pioneered by consulting firm Katzenbach Partners LLC, suggests that software companies from India will show greater market innovation and capabilities to service customers and deliver on their promises in long contracts.

RVG looks at how companies are rewarded in terms of their market capitalisation for growth andor improvement in margins. Companies with higher RVG values typically create newer sources of growth and these are more valuable than just improvement in margins.

The RVG of Indian outsourcing companies is many times higher than their American and European counterparts. The RVG of Infosys is 53.2, and Wipro’s is 25.6. Satyam Computer Services’ is 15.6, and TCS’s is 14.9; all evidencing very strong incentives to grow sales.

Companies with high RVGs that are predominantly rewarded by growth tend to have strong profit margins. On the other hand, foreign IT services companies, who are increasingly looking at an India play to reduce costs and shore up margins, will not be so handsomely rewarded.

This, according to the researchers, is because of the tough task of trying to deliver cost improvements within the context of long-running customer contracts.
In analysing IT and business process outsourcing companies, Katzenbach Partners found that Indian software companies have extremely high RVG ratings and that the market capitalisation already reflected the quality of their operations, cash flows and future prospects.

“The best of the Indian outsourcing companies derive 80% to 85% of their market-cap from investor growth expectations, so we expect that they’ll continue to invest in growth, invest in people and invest in client retention,” Nathaniel Mass, the creator of the RVG metric told DNA.

The researchers also found that Indian companies were willing to invest in clients even three and four years after the contract has started. This timeframe is when a majority of outsourcing deals normally fall apart.

The new metric gives the US players a dismal rating because Wall Street will not be rewarding them for growing and investing, and merely for cost cutting.