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The
Infosys, Wipro shock effect
The results
declared by Infosys and Wipro have shocked the Indian stock market. MOHAN
BABU writes that the Indian market should have been more prepared, and
analyses whether the fundamentals of the Indian software industry have changed
overnight as a consequence
The much
anticipated shock and awe that Americans promised in Iraq was instead delivered
at the Indian stock market by Infosys recently, followed by Wipro. After nearly
half a decade of going ga-ga over Indian IT and the merits of globalising, by
being listed in the ultimate stock market of them all, Nasdaq, Indians have
finally got the first taste of the flip side of American capitalism: ruthless
observance of the bottomline. The recent earnings announcements by Infosys and
Wipro, coming at a time of global uncertainty and slowdown, have shaken the
Indian stock market. Should the Indian market have been more prepared? You bet!
The first thing they teach rookies in American business schools is the motto
“maximising shareholder wealth” which is the overriding aspect of all corporate
activities. Innovation, employee morale, national interests, product innovation,
corporate fundamentals, and everything else take a backseat to this maxim. By
this yardstick alone, Infosys, the darling of the media, and one of the most
admired companies in India, failed the stock market, and the results are for all
to see.
As a keen
observer and investor in the American tech industry, having personally lost tens
of thousands of dollars during the stock market boom-and-bust of the nineties,
this recent “dumping” of Infosys shares did not surprise me one bit. The
American markets can be ruthless. In the quest for globalisation, Indian
companies that look forward to listing on Nasdaq and other American stock
exchanges need to learn to play the earnings-game.
The reaction of
the Indian media has been amusing, to say the least. Indian fund managers too
are reacting to this price dip like a deer caught in a headlight. There is shock
and disbelief that their “favourite” could be beaten so badly. Comparisons to
other stock market busts, including the infamous Harshad Mehta scandal abound.
Also, unnoticed by most, shares and ADRs of other software biggies have taken a
similar plunge. Birds of a feather flock together.
A necessity?
The Indian
software industry has enjoyed an easy ride during the past decade or so,
actually it has had it a little too easy. During the early nineties, body shops
with little background or fundamental business models were able to step in and
“export” software professionals to the global markets hungry for coders, who
could fix their Y2K bugs and help them move towards the e-commerce age. Bridging
this supply and demand equation was not rocket science. All one had to do was to
get requirements from hiring managers at large clients in the US, sponsor H1
visas for eager techies in Bangalore or Hyderabad, ship them out and skim the
margins off the billing rate. All this changed towards the turn of the century
for a number of reasons:
- Y2K was behind
us and companies were euphoric that the doomsday pundits were proved wrong. At
the same time they also realised that the need to hire legions of programmers
to fix the bug was gone.
- Dotcom bubble
burst. Companies woke up to the fact that e-commerce was not a panacea for all
business ills.
- The US economy
started on its precipitous dip after nearly a decade of growth.
- September 11
brought renewed calls to tighten immigration and visa rules across the West.
In a sense, the
rules of the game changed almost overnight. Indian companies with a pure “body
shop” business model and those selling the dotcom dream (remember Satyam Infoway
and Rediff.com? Nasdaq: SIFY, REDF), took a massive blow. However, not all was
gloom-and-doom in the high-tech world. The slowdown in the US lead to the growth
of the offshore outsourcing model. Companies started outsourcing work to IT
vendors that hired techies in India to get the work done at a fraction of the
cost. The bottomline: The rules of the game might have changed but IT consulting
and outsourcing still remains a lucrative business model.
Back to basics
Is the market
justified in beating up Infosys and Wipro because of sobering earnings
projections alone? One cannot justify the rationale behind stock valuations or
mood swings in the markets. However, what analysts can do is to try and keep
their eye on the ball, and ask if the fundamentals of the Indian software
industry have changed overnight.
Infosys, Wipro,
TCS, HCL, et al, are not rookies in the software industry. They were not founded
to profit from the Y2K boom or even the
dotcom mania.
Their history goes beyond the recent trends. They are professionally managed
high-tech companies focusing on helping clients across the globe by working on
their “unglamorous” bread-and-butter IT systems. Here, we are talking about
business critical software systems, networks, communications, databases and
application engines that no modern corporation can do without. Interestingly,
the typical IT budgets of most Fortune 500 and multinational companies easily
top a billion dollars, each. Indian companies are working hard to move up the
value chain, signing multi-million dollar deals with clients to manage such
systems, the budgets of which are not
dependent on the
current economic outlook alone. The flip side of globalisation is that Indian
companies are starting to face competition at home from the likes of EDS, IBM
and Accenture, who are rushing to sign on multi-billion (yes billion!) dollar
deals with Fortune 500 clients and setting up their own subsidiaries in India.
When Infosys
projects a growth of 11.3 percent to 12.7 percent for the current fiscal year,
it was perhaps being a bit too modest, the geopolitical climate being what it
is. But does the market want, or like, to hear the truth? Probably not. Having
got used to eighty and hundred percent growth in recent years, it may take a
while for a dose of reality to sink in. It may help if market analysts start
comparing the projected growth of Indian companies against that of their peers
across the globe. In a market where the Siebels and I2s have been making losses
quarter after quarter, even a 10 percent growth is great. Until that happens,
fasten your seatbelts, sit back and enjoy the ride.
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