Cover Story: BT 500: India's Most Valuable Companies [Pg.2]

The billion dollar question for the Indian software industry today of course is how much have the bombings of the World Trade Centre, and their fallout, further set the sector back by.

Nandan Nilekani, President, Managing Director & Chief Operating Officer, Infosys, says it's too early to comment on the business implications, and whether Infosys will be able to achieve a 35-40 per cent growth rate by the year-end. ''Our focus at the moment is on offering all support to affected employees and customers.'' Suresh Senapathy, CFO, Wipro, adds that while the short-term and medium-term impact can't be predicted, ''in the long term the value-proposition of India-based off-shore service providers is strong.''

The National Association of Software Services Companies (NASSCOM) has conceded that earnings for the second quarter, as well as growth for the entire year, will suffer in the wake of the terrorist attacks on the US. NASSCOM now feels that the software sector will now grow by 30 per cent (a worst-case scenario) as against the earlier projected 40 per cent.

Yet, a 30 per cent growth in such cataclysmic conditions should be considered excellent. But analysts wonder whether NASSCOM's optimism is fuelled by too much of octane. After all, with the US in retaliatory mode, the scenario can't get any better. Don't forget that the US accounts for 60 per cent of India's software exports. And take a look at individual companies.

NIIT (No. 12 on the BT 500) has close to half of its revenues of Rs 1,237 crore coming from the US. It's not exactly been a smooth ride for this training and software company so far. Profits for the quarter ended June had dipped by 93 per cent-and that's why NIIT thought it prudent to issue a profit warning way back in March.

Also in the wars is Hughes Software (No 23)-60 per cent of whose revenues come from the US-which issued a profit warning last fortnight.

Hughes has lowered its profit growth forecast for the current year to 25-35 per cent as opposed to the earlier estimate of 60 per cent. ''Communication companies worldwide have continued to announce downsizing and lower revised business forecasts,'' says Arun Kumar, President & Managing Director, Hughes Software Systems. ''Decision-making has slowed down significantly with decisions being increasingly moved indefinitely to the future. The visibility on restoration of our customers' confidence and the sector's turnaround is unclear. All these factors have impacted our business in the last two months and caused us to present this new guidance.''

However bad the scenario, the IT majors aren't in a mood to go down. The growth strategies aren't novel, but cost-cutting, acquisitions, and moving up the value-chain are the clear favourites at India it Inc. Infosys, for instance, has slashed costs where IT hurts (the company) most: salaries.

''The largest element of cost for Infosys is salaries. This year, the salary hikes for employees has been moderated against the typical 25 per cent to 30 per cent annual hikes. We have given a hike of 15 per cent and out of that 15 per cent, 10.5 per cent, that is 70 per cent, is given based upon revenues,'' explains Nilekani.

Adds Narayan K. Seshadri, Country Head (Business Consulting), Arthur Andersen, "The smarter companies are cost conscious; they maintain flexible cost structures and have enough slack to cut in a downturn. That way, they don't throw the baby out with the bathwater".

Acquisitions too are high on the priority list. Nilekani adds that Infosys is looking at acquiring companies that can ''give competency in new and desired technology areas''. Then, NIIT has set aside $100 million (Rs 480 crore) for M&A, in a bid to achieve its audacious target of a turnover of Rs 10,000 crore by 2005.

And note: There's no scale back. ''We intend to surpass the Rs 10,000 crore turnover in the second half of this new decade,'' declares Rajendra S. Pawar, Chairman, NIIT. There are two ways of getting there. One, by growing at an organic compounded annual growth rate of 44 per cent, and relying on the rest of the growth from acquisitions. But if the takeovers don't materialise, NIIT will have to grow at a compounded growth rate of just 52 per cent annual. Sounds absurd, given the current recessionary conditions.

Perhaps the pressure for the Indian it sector to move up the value chain has never been higher. Says Ramalinga Raju, Chairman, Satyam Computer Services: ''We have adopted a two-pronged strategy to move up the value chain of the customer. One part of the strategy is customer centric and focussed more on building long term relationships and offering end-to-end it solutions. The second part of our strategy is inward looking and focuses on our organisation structure. Last year we completed the restructuring exercise where the business units were organised into verticals (business domains) and horizontals (technology). This allows us get closer to the customers, grow our expertise in each domain and provide more and more value-added services to the customer.'' And Infosys is relying on its consulting practice to enable it to move into high value services.

Wipro too has targeted the consulting space, but more on it and technology strategy than business consulting. And HCL Technologies (No. 7) is focusing on higher value-added businesses like technology development services (which already account for 50 per cent of revenues), and entering into long-term collaborative relationships with clients at its 35 client-dedicated offshore development facilities. ''HCL Technologies has defined an elaborate business strategy in order to retain its position at the top,'' says Shiv Nadar, Chairman, President & CEO, HCL Technologies.

The it majors like Wipro, Infosys, Satyam and HCL can still hope for 30-35 per cent growth, but what happens to the second-rung and third-rung it companies? And what happens to yesterday's ''momentum'' stocks-the favourites of punters, who took them up to dizzying heights on the bourse, but who eventually had to let go and send them crashing down?

There's Zee Telefilms, for instance, which other than taking a hiding in the broadcasting arena, also came under a cloud for its lending to companies of tainted broker, Ketan Parekh. Then there's HFCL, whose grand ambitions of foraying into software, e-commerce and media have come to naught. Global Tele's Tirodkar is now readying for quarters of feeble growth.

For such companies, the objectives are two-fold. One, get back the trust of the investor, who has lost faith in the stock, because of their opaque policies. Two, get back to the businesses you know best. If the Reliances, Infosys and ITCs of the world are talking about acquisitions and new projects, the Zees, HFCLs and Globals have to think rationalisation.

Zee recently announced that it would halve the number of its subsidiaries to 10-12, and focus on its core strengths of content, access and broadcasting. HFCL Chairman Vinay Maloo too has abandoned his grandiose e-commerce and media plans, and says he will focus on telecom equipment and projects. Ditto with Global; Tirodkar says he's getting rid of seven to eight ''sub-businesses'', and he's even willing to take a hit of Rs 100 crore in this exercise (which however could be covered up in part if some new orders in the core businesses of software and enterprise network services do materialise).

"Success in reducing stock price volatility can deliver tremendous strategic benefits to companies." says Rajeev Gupta, Executive Vice President (M&As), DSP Merrill Lynch. Gupta goes on to list market communication and "deciphering the embedded assumptions of the market with regard to the future performance of the company," as the two things companies can do to achieve this.

Clearly, few CEOs would have expected for the business scenario to change so much, so fast. But then, as someone said, all things change, and we change with them. Time will tell if the companies that don't adapt fall by the wayside. Well, what's for sure is that many of them won't be able to hold on to their high rankings in the next few BT 500s.

-with additional reporting by Venkatesha Babu, Debojyoti Chatterjee, Swati Prasad, Seema Shukla, and Suveen K. Sinha

Quest For Value Creation

Here's a quick quiz:

1. Shareholder value can be best optimised by:
A: Sustained revenue growth;
B: quarter on quarter increase in profitability.

2. A correct growth strategy is to:
A: Drive industry to next level of innovation.
B: Diversify to spread earnings risk.

3.How much of growth should companies be on from M&A activity?
A: 33 per cent.
B: 50 per cent.

4. During an economic downturn, smart companies:
A: Continue to pursue their growth strategies.
B: Cut capital spending.

If you've picked A as the right answer for all four questions, you're either a gung-ho CEO or a very loaded investor. For those are exactly the mantras companies pursuing long-term shareholder value creation (and investors looking for long-term gains) should be following, says Peter Munro of consultancy firm, at Kearney.

According to Munro, trading short-term profitability in favour of sustained revenue growth goes a long way in creating long-term shareholder value. He, however, cautions that this policy requires a clearly articulated growth strategy outlining how value will be created over the long term. A credible management with a track record of success is also imperative. Sun Microsystems is a good example of this approach. Although a ''tech-wreck'' at the moment, Sun's value creation is still 600 per cent over six years, or 35 per cent per annum, far greater than most stock indices.

As for the growth strategies, Munro comes up with four alternatives: either companies should be in a position to drive the industry to the next level of innovation by leveraging a strong or unique capability; or they should be able to exploit a structural inefficiency in the industry; or act as an investment fund by buying value and selling high; or catch the next big wave. One warning: the days of trying to spread your earnings risk by foraying into diverse businesses are over.

Acquisitions may appear a quick way to grow, but don't depend too much on M&A for growth. At least 50 per cent of your growth should be organic. Don't count on M&A for more than a third of growth. And this too is a risky strategy, what with almost two out of three mergers failing to add value.

Finally, is it easy to grow amidst the prevailing gloom? Or is it safer to batten down the hatches? Munro believes that companies confident of their value-building growth strategies should continue to invest in them. ''These companies, based on our global findings, are five times more likely to resume their status as value building growers, compared to companies that respond to the economic pressure and focus excessively on cost reduction measures such as cutting capital spending and reducing marketing and R&D budgets,'' says Munro.

Is your strategy good enough?