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| RANBAXY:
The first Indian drug company to cross the $1-billion mark in
sales, it has consistently posted 20-25 per cent growth in profits
despite intense competition |
It turns out, the
talk about this being the age of knowledge economy isn't all talk.
Companies that operate in the two key segments of this industry, information
technology and pharmaceuticals, have been pulling in super-sized profits
and growing their toplines at break-neck speeds. Investors, on their
part, have been bidding their stock up, never mind the occasional
slump. It's no wonder, then, that four of the top 10 wealth creators
in this year's survey are from the two sectors. Infosys Technologies
comes in at No. 3, Ranbaxy Laboratories at No. 4, Wipro at No. 9 and
Dr. Reddy's Laboratories at No. 10. (Some of the others from the sectors
who figure in the top 100 are Sun Pharmaceuticals, Cipla, Satyam Computer
Services, and Lupin.) If you are looking for a number, the four together
have added Rs 21,615 crore in wealth over the last five years. No
small change, that.
If these companies have scored high in wealth
creation, it's for good reason. The Indian IT sector, which includes
software exports and services, hardware, networking, training and
IT-enabled services, will be worth Rs 89,300 crore in 2003-04, up
from Rs 76,500 crore the year before. That's a 17 per cent growth,
compared with the global average of 4 per cent. The robust growth
has pushed IT's share of GDP in India from 1.4 per cent in 1998-99
to 3 per cent in 2002-03. This fiscal, it is expected to grow to
3.8 per cent. Software exports, which constitute 60 per cent of
the industry's revenues, are expected to grow at more than 20 per
cent to touch Rs 55,500 crore this year, according to Nasscom.
Healthcare's story is no less impressive. Indian
pharma companies are acquiring companies abroad to expand global
presence. It's no more the old categories like anti-infectives,
vitamins and analgesics, but speciality and niche therapeutic categories
like cardiovascular, central nervous system (CNS) and anti-diabetic
drugs that are the new areas of focus. But what really has investors
licking their chops is the spilling over of the outsourcing phenomenon
into pharma. Basic research, clinical trials, contract manufacturing
are the three hot areas. India's advantage: world-class chemistry
skills and low-cost human resources. The domestic pharma market
also has a huge potential (worth Rs 21,400 crore in 2002), although
the growth rate is in single digit. The per capita consumption of
drugs in India still stands at $3 (Rs 138), which is amongst the
lowest in the world. In contrast, an American spends $191 (Rs 8,786)
and a Japanese as much as $412 (Rs 18,952) annually on healthcare.
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| WIPRO:
Its M&A strategy has paid off, with Spectramind accounting for
11 per cent of the total revenues |
Key Performers
Just because an industry is growing, it doesn't
mean that all the players in it will benefit equally. How much of
the overall growth comes their way will depend on their own strategies,
which could be in terms of choice of segment, markets, investment,
people, and mergers and acquisitions. But like it happens in all
sectors, a few key companies will set the trend and the others will
inevitably follow. In it, such bellwether players could be Infosys,
Wipro and TCS, and in pharma they could be Ranbaxy, Dr Reddy's and
Cipla.
Take a look at the poster boy of Indian it
industry, Infosys. This fiscal, it will touch $1 billion (Rs 4,600
crore) in revenues (the only other $1-billion outfit in the industry
is TCS, but it's a division of Tata Sons and not yet listed), and
have 25,000 employees on its payrolls (it is hiring a thousand engineers
every month). What's interesting is that despite its increasing
size and pressure on billing rates, the company has reported stellar
profits quarter after quarter. Says Avinash Vashishtha, CEO of neoIT,
an offshore outsourcing advisory and management firm: "Their
ability to sustain growth on an increasingly large base has been
amazing." In fact, according to a recent Nasscom study, Infosys'
margins are second highest in the world in it software services.
Most profitable: Microsoft. That apart, Infosys has started looking
at acquisitions overseas. Last year in December, it struck its first
such deal when it bought Expert Information Services of Australia
for $23 million (Rs 105.8 crore). Yet, keeping up its wealth generation
will be a challenge (See Infosys: Needs More Aces).
Wipro, on the other hand, has aggressively
pursued acquisitions to grow. In 2002, it bought Spectramind for
a whopping Rs 470 crore to get a toehold in the booming BPO business.
Today, the 8,456 employee-strong Spectramind fetches 11 per cent
(about $27 million) of Wipro's revenues and is expected to rake
in an impressive $100 million this full year. Says Amit Khurana,
an analyst at Birla Sun Life: "In hindsight, buying a BPO operation
rather than building one like Infosys has proved to be a smart strategy."
Simultaneously, other analysts say, Wipro has managed to build competencies
in the area of enterprise application, especially in BFSI (banking,
financial services and insurance).
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| INFOSYS:
The company's margins are the second highest in the world in
IT software services |
Satyam Computer Services, India's third-largest
it company, is focusing on what it calls "a global delivery
model", where offshore need not mean just India. For instance,
Satyam will deliver services out of centres in Malaysia, Shanghai
and Toronto. "We are consistently trying to follow an enduring
de-risked wealth creation model that ensures diversification and
verticalisation in a manner that delivers higher value," says
K. Thiagarajan, Director and Senior Vice President, Satyam. Adds
Chairman B. Ramalinga Raju: "The centre of the universe is
your relationship with the customer and that has been the principal
driver for Satyam."
But with the backlash against outsourcing raging
in the US, will the earnings of it companies stay as healthy as
before? Raman Roy, CMD, Wipro Spectramind, thinks so. "(The
backlash) cannot become a trend, and the economic reality will finally
call the shots," he says. Sector analysts are equally optimistic.
An SSKI report, for instance, notes that "the sector is in
for a patch of strong volume growth, and in a stable billing rate
environment, a significant part of the growth will fall through
to the bottomline." That should be music to the ears of investors.
In Fine Fettle
In healthcare, the three big players-Ranbaxy,
Dr Reddy's and Cipla-are already well entrenched in the generics
markets of developed countries, currently valued at $45 billion
(Rs 2,07,000 crore) and expected to touch $80 billion (Rs 3,68,000
crore) by 2008. In fact, Indian companies accounted for over 30
per cent of the drug master files (DMFs) filed in the US in 2003-the
largest share of all countries. India's share in Abbreviated New
Drug Applications filings too has been rising consistently and stood
at around 23 per cent in 2003. The number of ANDA filings went up
from 50 in 2002 to 80 in 2003, and is expected to rise to 130 in
2004. India is also emerging as a low-cost manufacturing hub for
pharma and companies like Matrix Laboratories, Nicholas Piramal
and Shasun, besides the recently listed Divi's, are betting big.
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INFOSYS: NEEDS MORE ACES
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| A
substantial proportion of Infosys' wealth creation has come
from a build up in expectations of rosy future prospects. Therefore,
an aspirational challenge to deliver cost of equity return on
the market value over, say, the next five years will require
Infosys to not only deliver on medium-term profitability growth
but to also systematically build the value of its longer-term
prospects. It is debatable whether the existing India centric
offshore service delivery and largely organic growth model will
enable high growth rates over a long run. The answer then lies
in much more rigorous scrutiny of the value impact of: products
in the R&D pipeline that can sustain exponential growth;
judiciously priced and structured inorganic growth; and consideration
of the potential value impact of financing, e.g., through share
buybacks and debt financing.
-Team Stern Stewart
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RANBAXY: NO ROOM FOR ERROR
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Most of Ranbaxy's wealth flow
has come in anticipation of future value growth from its international
expansion and a drug discovery pipeline, whereas only a third
of this has been delivered to shareholders through an increase
in fundamental profitability and dividends. To deliver the
current cost of equity (13 per cent) return on the current
Enterprise Value over the next five years, Ranbaxy needs to
not only deliver on medium-term profitability but also on
the value of its longer-term prospects.
-Team Stern Stewart
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Ranbaxy, the industry's biggest wealth creator,
has become the first Indian drug company to cross $1 billion (Rs
4,600 crore) in sales and has been consistently maintaining 20-25
per cent growth in profits despite the increased competition and
price dips in the generics market. It figures among the top 10 global
generic companies, and has a strong pipeline with 40 ANDAs under
approval in the US (of which 12 filings are worth $9 billion in
market value).
But the concerns would be the rising research
costs and the legal setbacks (See No Room for Error). For instance,
Dr Reddy's has seen a sharp increase in research costs while earnings
are under pressure for lack of big product opportunities. Its patent
challenge of Pfizer's hypertension drug Norvasc was rejected by
a US court, resulting in the loss of a top dollar drug opportunity.
"Wealth creation in pharma cannot be viewed in a quarter-to-quarter
time frame, but needs a multi-year point of view," says G.V.
Prasad, Executive Vice Chairman and CEO of Dr Reddy's Laboratories.
The reason, he says, lies in the long time cycles of this industry,
where not just the NCEs (new chemical entities) take close to a
decade to realise value, but even generics require a three- to four-year
cycle.
Yet, there's no dearth of believers. Last December,
Newbridge and Singapore's Temasek struck a deal to buy 15-odd per
cent in the Matrix Laboratories for Rs 337 crore. Earlier, Citigroup's
venture arm paid Rs 126 crore to acquire a 12 per cent stake in
Lupin. In it, no big-ticket M&A has taken place yet. But that,
however, should not prevent one of the global it giants such as
IBM or EDs from picking up tier two or tier three companies. After
all, what's driving the knowledge sector boom is India's growing
pool of skilled and cheap workers. As long as that remains an edge,
wealth creation will happen-one way or another.
-additional reporting by Venkatesha
Babu, E. Kumar Sharma, Supriya Shrinate and Dipayan Baishya
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