Monday, February 16, 2009


The fraud at India’s fourth largest software exporter, Satyam Computer Services Ltd, has kick started a Darwinian consolidation among top-tier Indian IT companies as they pitch for Satyam, in part or whole. The company is still reeling under the revelation of $2 billion fraud by its founder on January 7.

Various companies are in the fray to acquire the company either in part, depending on their core business, or in its entirety. These include, the IT arm of India’s largest engineering company Larsen & Toubro Ltd; fifth largest Indian IT company HCL Technologies Ltd; diversified conglomerate Essar Group; London-based diversified Indian conglomerate Hinduja Group; Indian IT company i-Gate Global Solutions; and Spice Group.

The Indian IT industry is in the next stage of evolution, which commenced with the emergence of a number of companies establishing themselves as industry leaders by virtue of expertise in a certain domain, big clients’ accounts and sheer geographical spread. What now follows is the second stage of evolution, that of, consolidation which will involve mergers and acquisitions (M&As) that will shrink the number of companies in the top tier.

A new wave of M&As will be triggered by the acquirer’s business objectives to expand into new markets and new customers, high-end intellectual property of either process technology or product technology and also to garner new skill sets.

A country’s stock market and the performance of the respective blue chip companies is often seen as the barometer of its economic health, and a gauge of investment sentiment. On that parameter, the Indian companies have outclassed its U.S. peers by a wide margin for the first time.

The total 30 companies on the Sensex, the benchmark index of the Bombay Stock Exchange of India, have shown average growth in net sales at 7.75% and a dip in net profit of 13.20% in the third quarter of the current financial year. This is in sharp contrast to the U.S. Standard & Poor’s 500 companies’ profits declining by about 35% on an average, during October-December 2008. This is the sixth consecutive quarter when the profits of the U.S. companies declined, compared to the first quarterly fall in the aggregate profits for the Sensex companies in the recent years.

The robust performance by Indian companies could help explain the optimistic outlook of the Government that estimates Foreign Direct Investments (FDI) for next financial year to reach $40 billion, twice the amount received during the first half of the current financial year.

A strong economy rests on the foundation of sound financial institutions. The Indian economy’s relatively firm footing (see Issue 4 | Volume 1) in the face of turbulent global economic conditions, is also attributable to its financial institutions. While some of the global financial institutions Lehman Brothers Holdings Inc., the Federal National Mortgage Association, Wachovia Corporation, Merrill Lynch & Co., Inc. among others either had to be salvaged or simply cease to exist; 19 Indian financial institutions have made it among the Top 500 Global Financial Brands 2009, released by Brand Finance Plc, in association with U.K.'s The Banker magazine.

Among the 19 Indian financial institutions that have reported an average 35% growth in interest income and a higher 42% jump in net profit for the quarter ended December 2008, 13 new entrants in the Top 500 list this year are state-run organizations highlighting prudential banking norms efficiently steered by the country’s central bank, The Reserve Bank of India (RBI).

However, RBI disappointed the industry by falling short of announcing in its Credit Policy on January 27, any move toward a lower interest regime to boost demand, which was widely expected as an appropriate method to stem the economic downturn. The expectation of further rate cuts was bolstered by the RBI’s own assessment of inflation going down to 3% by March 2009 from the current 6% and a peak of 13% in August 2008.
The government did offer reasons to cheer as it announced cuts in prices of petroleum products twice in the last two months, a decision which will further help contain inflation and lubricate the wheels of the economy.