The rapid decline in the fortunes of India’s outsourcing services firms has been well documented. Both volumes and pricing are taking a hit due to the recession in the developed world and the industry is expected to report a drop in revenues in dollar terms in the next fiscal year that begins 1 April. This is reflected in the share prices of Indian software companies as well, which have more than halved since January last year.
An interesting report by Edelweiss Securities Ltd’s IT analysts, Viju George and Kunal Sangoi, documents the performance of top Indian IT firms in the global market capitalization league table. Since January 2008, only Cognizant Technology Solutions Inc. has improved its ranking among global tech firms, from 83 in last January to 65. Infosys Technologies Ltd held its position at 25, while Tata Consultancy Services Ltd fell to 35 from 24 and Wipro Ltd to 58 from 38.
Meanwhile, their closest competitors, International Business Machines Corp. and Accenture Ltd, improved their rankings to second and 16th positions from 6 and 22, respectively. Hewlett-Packard Co., which now has a large software services exposure thanks to is purchase of EDS, maintained its eighth position.
Also See Ranking Declines (Graphic)
Of course, these companies have many revenue streams other than IT services, and hence, aren’t directly comparable. But it does look like Indian IT has underperformed global IT services companies. The report says that one reason for this is the higher valuation multiples enjoyed by Indian IT firms last year. The other reason is that the slowdown in growth for Indian IT is much higher compared with global peers. While Indian firms have grown at an average rate of about 30%, growth for peers such as IBM and Accenture has been much lower.
Now, both sets of companies are expected to report flat or marginally negative growth. The fall in the case of Indian IT is much harder. As a result, the argument that the offshoring model is defensive and companies will increase offshore work in a downturn seems overstated. At least, global investors don’t seem to think so.
This brings us to the question of the outperformance of Infosys and Cognizant vis-a-vis TCS and Wipro and other Indian IT firms. Both these firms have consistently grown at superior rates and are expected to have a higher cushion in terms of profit margin. Besides, they also benefited in the portfolio reallocation after the swindle at Satyam Computer Services Ltd came to light.
Graphics by Paras Jain / Mint
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