CNBC-TV18 broke the story last week that a significant chunk of Patni Computer could be up for sale and the larger issue is the pressure on midcap Indian IT companies.
Excerpts from an interview given to CNBC-TV18
Q: A lot of analysts are saying that it is not only Patni but a lot of Indian IT companies seem to be interesting targets right now?
Zaveri: Surely they are, there have been some rumours of that for some time now and the evidence was seen when EDS acquired BFL. In the case of Patni also, the rumour has been there for a while now and even for a larger company like Satyam, rumours are that IBM might be acquiring it but both the managements have denied the rumours. I believe there is some substance to this theory, that many of the midcap IT companies will get acquired over the next few years.
Q: The Forrester Research Report in March said that the top three big Indian IT companies had 40% of the outsourcing market as against just 25% three years ago. So, the big guys are scaling fast and getting big deals etc and so there is lot of pressure because Patni, which is the sixth biggest IT company, is well under billion dollars, so, are the big guys putting pressure?
Mukherjee: Yes you are right but if you look at it from the global outsourcing market, it is about a trillion dollars and we think it has the potential of becoming a 1.5 trillion dollar per year business very soon. Out of this one trillion dollar market, 6% comes to countries like China, India, Philippines and 50% of that is coming to India and there is a significant opportunity for increasing it from the current 3% to 10%, so, on the demand side, we donít see a problem. The problem is on the supply side and that is what the tier-I Indian companies and the MNCs are addressing - that is to scale up and to scale up they are looking at reservoirs of talent available and mid-tier companies like Patni are good targets.
Q: You advice a lot of startup companies to become the next Infosys or Wipro. Is it time to say that to become the next Infosys or Wipro is tough?
Mukherjee: We see that there are couple of ways of doing this. One is that the mid-tier companies have to be the best to deliver value and get value out of the system. The second thing is if they want to play in the big league, they have to have scalability and they can achieve the scalability through acquiring companies in say China, Philippines etc or acquiring other tier III companies or merging with large tier I MNCs.
Q: That is an area where the Indian midcap IT has not been aggressive?
Zaveri: Sure, we have some like KPIT which has been a consistent acquirer, i-Flex has been acquiring before it itself got acquired. But to step back a little, my view is that there are a number of avenues available for the midcap IT industry to grow. I think they can remain independent, go organically and there are avenues available. For eg. it makes sense for them to verticalise faster and more emphatically than what they have been doing till now - like NIIT Tech has been on BFSI more strongly and they acquired a company in UK to enhance their competitive edge. The other eg is: Foursoft has been acquiring logistic assets from around the world for sometime now.
Q: What about pressure from not only big Indian IT players but even overseas. We have seen IBM, Accenture, HP make the first move, their stories are legendary now but in the top 10 of global IT there are still who have not made any acquisition and have almost no India presence and their shareholders in America and Europe are getting after them that if you have to be a top 10 global company, you have to have a India footprint, so you have acquirers out there who are looking?
Zaveri: Yes it is a valid point but at the same time, when we speak to the mid-tier IT companies and most of them are not sellers, and they have a fairly entrenched position and they have their own aspirations. Today, I donít see a good quality asset being available or coming to the market over the next 12-18 months, but that is what appears at this point in time.
In the view of the fact that they do have aspirations of creating market cap from the current range of USD 200- 500 million to about USD 2-3 billion over the next 4-5 years, which is a fair possibility, and I think people who have remained in the game after some tough years are here for the long-term.
Q: As a final analysis, would you say that specializing in one area is the way for Indian midcap IT companies?
Mukherjee: I think that is the first step and there are lots of opportune areas - like engineering servicing is an emerging area and many companies will be getting into these areas, like Geometric, Rolta etc. And there are other areas like specialized testing and so on and there are niche areas where mid-tier companies should get into, and once they have attained a certain size, they should possibly acquire and get that scale in place.
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