First of the mohicans!
IT, ITeS and related services prove a new facet of India to the world

With Indian IT companies such as Satyam, Cognizant and Infosys continuing to post impressive sales growth in excess of 25% during FY07, the Indian IT sector still remains the emperor within kings and continues to witness growth that would be an envy across the globe. There is a robust demand for off shore IT services and this scenario is surely going to rub off on the relatively smaller players such as i-Flex solutions, Geometric soft ware, MegaSoft , Infotech Enterprises, Subex Azure to name a few. All the above mentioned companies have a burly base of marquee clientele and have a strong presence in the high growth markets. The aforesaid companies have been consistently making profits and even MegaSoft (the smallest of the eight companies in terms of yearly revenues) has posted revenues in excess of Rs.1 billion in FY06 and a profit after tax of Rs.201 million.

With International Data Corporation declaring that the worldwide IT spends would surge by 7.2% CAGR (from $1,384 billion in 2004 to $1,964 billion in 2009), India surely is set to grow even beyond what has been forecast previously. An amazing 58% was the overall share of India in the penetrated IT market in FY05; and this given the fact that the subcontinent’s share in IT services global sourcing surged from 62% in 2001 to 65% in 2005; and in the ITeS-BPO segment, the figure for the same period rose from 39% to 46%. India was ranked at the top in the AT Kearney Global Services Location Index Study in 2005 that was taken out to compare 40 different sourcing destinations across the globe. Given the depth in the service offerings and the cost advantage, India is right on track to augment its leadership.

As recent as in the previous quarter, IBM announced its decision to invest $6 billion in India to integrate service solutions and bring down operation costs. This after having already invested more than $2 billion over the last three years. From a workforce of 9,000 in 2004, IBM has now grown up to 43,000 (while shedding around 14,500 jobs in Europe) – India now is its largest outsourcing hub. These initiatives come after all the major companies like Microsoft , Intel and Cisco have already individually announced India investment plans in excess of $1 billion. On the flip side, getting the desired manpower still remains a herculean task for this sector. Even though India produces 500,000 engineers per year as compared to 75,000 produced by America, Nasscom predicts a tremendously debilitating shortage of 300,000 skilled personnel at the middle level in the IT sector by the end of the current fiscal year. And with the likes of Infosys (58,000 employees worldwide) and TCS (who’ve already crossed a headcount of 60,000) competing with international giants for recruiting quality manpower, the cliched worry, that India will never be able to significantly move up the IT & ITeS value chain, is coming out to be true, faster than expected. This clearly proves that urgent intervention measures are required at both the policy level (from the government) and at a public-private partnership level (with the likes of NIIT, Mindmine contributing middle and lower level skilled staff).

All said and done, the promising scenario in the Indian IT sector, at least with respect to revenues and profits, holds good not just for the biggies, but also for the mid-cap companies. As Nandan Nilekani commented to B&E, even though “India stands at the cusp of history,” only if policies are pro-actively modified to support the tremendous growth potential, will India be able to exploit the advantages!

Leading with the power of truth

Almost every famed legend gleams with prodigious talent. Satyam Computers Services Limited can surely be bequeathed a name among such greats, with Ramalinga Raju holding the prodigious mantle high, what with his dexterous marshalling of resources to take on not just Indian IT biggies, but global IT majors. While the company did suffer from the IT bubble bust of 2001, it seems to be sure-footed in the unraveling of strategies to gain top rung luster.

Despite positive performance in the current years, critics have regularly lambasted and labeled Satyam a straggler when compared to the IT icons such as Infosys, TCS and Wipro. Satyam on its part seems to have silenced them substantially for now by posting smashing revenues in Q1, FY 2005-06 of Rs.14.4 billion (a capacious yoy growth of 36.3%) and towering profits of Rs.3.54 billion (an unbelievable increase of 86.18%).

Most critically, Raju has shied away from moving up the new-age tech value chain, and focused on consolidating gains in the contemporary technology spaces, like enterprise business solutions. Ramalinga Raju proudly admits that Satyam is one of the youngest Systems Integrators in the world, “Our leadership in the Enterprise Business Solutions space is well-known, and continues to anchor our growth.” Raju’s foresight in transforming the fortunes of Satyam back to its core competence – IT services – came to the fore when Satyam decided to get leaner. The exit from Sify last year signaled these very intentions of Satyam. To the horrors of many analysts, Raju has even moved away from the US market. “The performance during the previous year... demonstrates the strength of the company’s de-risked business model with dependency on the US market coming down considerably,” asserts Raju.

Vindicating this approach, last year Satyam gained a remarkable $316 million in earnings from its core IT servicing business; and albeit winning the award of the Global #2 Outsourcing Vendor (as per The Black Book of Outsourcing’s Top 50 Best Management Companies) in July 2006, Satyam actually continues to lose money in its BPO business, garnering just $6 million sales. Sailing vibrantly through all this, Raju has passionately and sincerely committed to stressing the “continuous emphasis on building a robust Satyam brand!”

Truly speaking, Raju’s ability to identify, nurture and accelerate growth in contemporary business practices has helped recreate an undeniable footprint, which has resulted in a strong platform for future growth. Satyam is today one of the youngest IT Services companies to be featured among the top companies in the world, primarily due to the entrepreneurial drive, unflinching commitment to delight customers and the culture of continuous learning that percolates down the order in the organisation. For us, Satyam smashes into the B&E Power 100 list at #4 in the IT sector!

Faster, higher and stronger
Not the goods though, as players enter into M&As to unleash growth

The FMCG sector has witnessed heightened M&A activity in the recent past in order to expand product and market presence in a sluggish sector. With FICCI extrapolating a growth of merely 2% for the year 2005-06 in the (so-called) fast moving consumer goods industry, the bigwigs of this space are looking for new avenues to overcome the negative trend.

Godrej Beverages & Foods Ltd. grabbed Nutrine for Rs.2.7 billion, Wipro acquired the Glucovita brand from HLL, and Dabur India acquired the loss making Balsara (which is now showing profits), with brands like Odonil, Odomos, Odopic & Sanifresh for Rs.1.4 billion. In the same league, Wockhardt acquired Dumex India, owner of the brands Protinex & Farex from Royal Numico NV.

Now where are these surges going to end up? Well they are all lurching to bet their bucks on the two high potential sectors of healthcare and food. And why not, when the food market will reach Rs.1.35 trillion by 2015 (according to Rabo India Finance) and the personal health-care segment recorded stupendous sales of Rs.55.5 billion in 2005; a growth of 10.1% over 2004. Elaborating on the strategic logic, Hemendra Mathur, Associate Director of Rabo India Finance, who did the valuation for Protinex and Farex states, “Acquiring a well known brand does help to enter the country, and Wockhardt to strengthen its health business in India, needed nutrition brands like Farex.”

Furthermore, acquiring the already established brands alleviates the big daddies from the trouble of launching and establishing new brands in a market. But there are other players who have been successful with a direct entry. A classic example is ITC, whose brands Aashirvaad Atta and Sunfeast have shown phenomenal growth. With changes in lifestyles and only 2% of agrifood being processed (according to All India Food Processors’ Association), food is going to be one of the most high potential segments in the FMCG arena in the future.

Players are equally bullish on the health-care & personal care segment. One of the prominent names on the horizon is retail behemoth Pantaloon, which is charting out massive plans for its new cosmetic brand Tumeric. “There is a huge potential for ayurvedic cosmetics in India which has been untapped,” reasons Sanjeev Agarwal, President, Marketing, Pantaloon Retail. Godrej Consumer Products Ltd. has recently completed the acquisition of Rapidol UK’s (with hair colour brands like Intecto & Soft lene) South Africa business. The big daddy of FMCG, HLL, has made a comeback in the ayurvedic segment with a new brand coined as Fair & Lovely Ayurvedic Fairness brand. Not to be left out, Kolkata-based FMCG company Emami, too, is increasing its thrust on ayurvedic products by aiming to make its health-care division a Rs.3 billion business by 2008. Sunil Duggal, CEO, Dabur India Limited articulates in his vision for Dabur, “We plan to develop a more balanced portfolio of business. International business, Homecare, Healthcare and Foods will be our main drivers of growth.” This sentiment is echoed across the FMCG sector today.

As growth becomes a pipe dream, FMCG behemoths are all set to cash on the ‘golden geese’ of food and health care. In view of this trend, the wave of mergers & acquisitions is expected to continue.