FT : Services Raj May Take A While Longer To Establish

Tuesday, August 28, 2007

Only half a century after the end of colonial rule, Indian companies are coming to Europe to build empiresof their own.  Mittal led the way with the takeover of Arcelor in 2006.  After five years of terrific growth, as outsourcing went global, might India’s IT services companies leadthe next wave of consolidation?  That hope looks premature.  In terms of market capitalisation, the big Indian trio – Tata Consultancy Services, Infosys and Wipro – are far larger than their European rivals.  But this is thanks to valuations of 3-4 times sales, which reflect high levels of profitability, and top lines that are expanding by about 30% a year.  The actual businesses are still much smaller.  All three will have sales of about €3bn-€3.5bn this year compared with Cap Gemini’s €8.8bn.  More than doubling in size at a stroke, in addition to managing integration across several countries, would be a big leap for historically conservative Indian managements.  And it would not make much sense either.  As the likes of Hewlett-Packard have demonstrated, putting together sizeable people-based businesses is often a recipe for squandering the value tied up in customer relationships, culture and the accumulated knowledge of staff.  It would also be an expensive way to gain the strong “onshore” presence in Europe that is perceived to be necessary to compete for higher value work.  This might better be achieved by poaching the right people or through small deals that add specific consulting expertise.  A big European purchase would also dramatically hit the superior growth rates and margins of the Indians.  Domestic consolidation to take out costs first seems a more sensible route to building a group with global scale.  With a structural cost advantage relative to western counterparts and plenty of growth at home, there is more than one way to take on the old imperialists.

Reference : http://www.ft.com/cms/s/1/818c58fc-52a3-11dc-a7ab-0000779fd2ac.html

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