Posted by: qmaxim | November 26, 2009

Wither Indian IT companies?

Indian IT/ITES/BPO industry exports are expected to touch $ 60 billion dollars this year. There has been unprecedented buildup of  multinational companies’ manpower & skill set   in India in the last 4-5 years. For instance, IBM has almost 70,00o employees in India. Amid all these  positive developments, there has been questions as to whether the large Indian companies like Infosys can really compete with these multinationals. Meanwhile, there was announcement by one of the pioneers of the IT movement -Mr Narayana Moorthy (NRN- the founder chairman of Infosys)  that he would be selling part of his   shares to start a venture capital firm.  Again, there were dark hints that he is abandoning the company when the going was good. Also, the author of  the blog made a comment that Murthy is getting more credit for charitable activities as compared to Mr Azim Premji – founder another IT major Wipro.

My reaction to this post appears below, actual post (Infosys VC – True Story ?) is below my post:

Views expressed in the blog and yourself make the following points: –

Mr. N.Narayana Murthy (NRN) is bailing out of Infosys now as its trading multiple is significantly higher than its international peers (like IBM) & that share price can only go downhill now onwards. –

Future for Indian service companies is looking increasingly bleak in view of hiring spree of international companies in India and soon their headcount would be close to that of Indian companies thus negating cost advantage of Indian companies. –

NRN is conning the public into thinking that he is going to do public service by starting the VC fund but the real motive is book profit when the going is good. – Mr Azim Premji (AP) has a much bigger VC fund and has been doing lot of charitable work but has not been getting as much credit as NRN.
My comments are as follows: –

Fast growing and well managed companies from developing countries (especially BRIC countries) trade at much higher multiples compared to companies from mature markets. This is a historical fact and is likely to continue according to many well known commentators such as Chris Wood. Of course, share price at a given time (& earning multiple) cannot be predicted accurately as it is dependent on several factors such as inflow from financial institutions, market sentiment, exchange rate, political risk , potential of the company, etc. In view of this, I think there is still considerable upside potential for relatively well managed companies such as Infosys.

– Though foreign companies have ramped up their operations in India, still substantial part of their workforce ( & majority of their stake holders) are still in developed countries. This is likely to continue in the near future since they cannot afford to do large scale firing of workforce in these countries to avoid severe backlash in those countries. In view of this, Indian companies are likely to continue have cost advantage over their multinational peers in the near future. Meanwhile, they continue to move up the value chain, build new competencies and continue to hire low cost associates thus cementing their low cost advantage.

– After the share sale, Murthy family will continue to hold substantial shares of the company thus would be very much interested in future of Infosys.It not necessary that all VCs should have sole objective of maximizing profits. NRN could combine funding for profit start-ups with not for profit start-ups with social impact. There are several venture capital funds which do this already. In view of his and his wife Sudha’s track record so far, I don’t see why we should not believe them.

– Finally, there is no doubt that both AP as well NRN (& other cofounders) have made pioneering contribution towards building IT industry in India. However, AP’s stake in Wipro is close to 80% (as compared to Murthy family’s single digit holding) and he is really the owner of the company. Also, according to published data, his dividend income is more than turnover of many companies in India. He also comes from a fairly wealthy family and considering his holding he is many times wealthier than NRN. So, even if he sells many more shares, it is not going to dent his control over Wipro. Compared to him, NRN comes from a modest background, his building much admired and large company from scratch continues to act as inspiration for many middle class Indians. Thus he is likely to continue hold larger mindshare as compared to AP in the near future. Of course, AP’s desire to maintain a low profile is also a contributor to this disparity.

===================original post ================================

Infosys VC – True Story ?

We know the media (manufactured?) view of Infosys and its founder. We also know the admiration of young kids and the middle-class of the Infosys First Family.
Here is a slightly different view:
http://indiahousingbubble.blogspot.com/
Strangely Mr Premji has created a much bigger VC and has been doing much bigger charity stuff than Infosys, but do we know that?
Your Valuable comments are welcome.

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