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Article by Mohan Babu


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 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.





About the Author

  • A Bio and profile of the author, Mohan Babu, can be found at his homepage
  • Mohan has authored a book on Offshoring and Outsourcing (Publisher McGraw Hill, India), a link to which can be found here
  • Mohan has also authored an Online book on "Life in the US," available for free download.
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    For FAQ, Trivia and Information on Life in America, visit the Ask-A-Desi section

    ©Mohan Babu: All Rights Reserved 2005

    Mohan Babu is an international consultant trying to find the ‘sweet spot’ where IT meets business. E-mail: mohan He is also the author of a recent book on "Offshoring IT Services"

    All rights are reserved. Mohan Babu ("Author") hereby grants permission to use, copy and distribute this document for any NON-PROFIT purpose, provided that the article is used in its complete, UNMODIFIED form including both the above Copyright notice and this permission notice. Reproducing this article by any means, including (but not limited to) printing, copying existing prints, or publishing by electronic or other means, implies full agreement to the above non-profit-use clause. Exceptions to the above, such as including the article in a compendium to be sold for profit, are permitted only by EXPLICIT PRIOR WRITTEN CONSENT of Mohan Babu. 

    Disclaimer: This document represents the personal opinions of the Author, and does not necessarily represent the opinion of the Author's employer, nor anyone other than the Author. This Article was originally published in Express Computers


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