Namaste, America!
By Vanessa Richardson
Redherring.com
October 19, 1999
redherring.com
Looking to invest in a new, hot, and relatively stable
foreign market? Forget about the Pacific Rim and Latin
America -- think India.
India is a hotbed of technology
companies, many of which are
growing at an average annual clip
of 50 percent. During the past
decade, the country has
transformed itself into a leading
offshore software development
and IT center, trailing only the
United States in software exports.
Until now, it's been almost impossible for Western
investors to place money in these fast-growing
companies, which typically were listed only on Indian
exchanges. However, as the Indian government
realizes the importance of going global, it's starting to
relax the strict regulations that companies must follow
to qualify for overseas stock exchanges.
The tide is turning rapidly. Since
Infosys (Nasdaq: INFY), a
Bangalore-based IT software
developer, became the first to list
on a United States exchange in
March, the company's shares (in
the form of American Depository
Receipts, or ADRs) have
skyrocketed. ADRs are a form of
security that investors receive in
exchange for buying foreign
shares.
Now Satyam Infoway, an Indian
Internet service provider, has
become the second to file for ADRs. Satyam's debut
on Nasdaq is scheduled for early November. Industry
watchers expect another Indian company to follow
before year-end. Next year, as many as 20 more
Indian software companies are expected to file with
the SEC to trade shares.
In the meantime, American institutional investors and
reps from Nasdaq and the New York Stock Exchange
are scrambling to take public India's most profitable
crown jewels, hoping to make a king's ransom in the
process.
SUBCONTINENTAL GIFT
India became a hub of technology growth for three
primary reasons. First, 1980s trade barriers forced
Indians to rely on their own technology, forcing Indian
programmers to become inventive software coders.
Also, Indian schools began emphasizing rigorous
mathematical studies more so than the typical
American graduate school, which many Indian students
now consider a piece of cake. Finally, the jobs of
status have changed from doctors and lawyers to
engineers and software developers.
India now has three "Silicon Cities" -- New Delhi in
the north and Bangalore and Hyderabad in the south.
Nearly every United States technology company has
established a research and development facility in
those areas or developed outsourcing partnerships
with home-grown companies. (Microsoft (Nasdaq:
MSFT), Baan (Nasdaq: BAANF), and Sun
Microsystems (Nasdaq: SUNW) are among the most
recent companies to do so. The main attraction for
Americans is the abundance of high-quality, low-cost
talent. The end result for India: $2.7 billion in software
is expected to be shipped overseas in 1999.
But will India become next year's Indonesia or Brazil,
countries hit hard by economic downturns? The
government wants to make sure that's not the case. It
has strict regulations about companies listing on the
national exchange in Bombay, as well as on exchanges
overseas. "Unlike the United States, companies need
at least three years of profitability before they can list,"
says Somshankar Das, a partner at San
Francisco-based venture capital firm the Walden
Group, which invests in Indian companies. "It's the
right thing to do, though; otherwise many scam
companies would list there and abroad and ruin the
country's reputation of having a stable market. On the
other hand, it's difficult for Internet companies to list,
so there remains the question on how to locally finance
these fast-growth companies."
The Bombay Exchange, which lists about 40
companies, is up some 66 percent this year, but it's not
big enough for local companies to receive the financing
they need to go global. Adds Vinod Khosla, a VC
guru at Kleiner Perkins Caufield & Byers, "It's very
hard for local investors to understand the strategy and
general direction of companies that have a bulk of
business coming from the U.S., so it's better for these
companies to have a global investing pool."
A good example to follow is Israel, which has nurtured
its high-tech community. The shares of about 80 Israeli
companies are listed in the United States, most of
which are doing well.
As regulations eased, companies started going to
Europe for capital in the mid-1990s, listing primarily on
the London and Amsterdam exchanges. "Now as
these companies become bigger, more sophisticated,
and more determined to develop global reach, they
realize that the biggest pool of liquidity is in New
York," says Georges Ugeux, group executive vice
president of international and research for the New
York Stock Exchange. He states the NYSE has been
in serious discussions with 40 Indian companies of all
types to list on the exchange and expects that ten of
them will file either there or with Nasdaq within a year.
STAR OF INDIA
Infosys, a Bangalore-based IT powerhouse, was the
first to list. Infosys is only the fifth-largest IT firm in
India based on revenues, but it was the first to adopt
American-style accounting and disclosure practices,
while also giving out Silicon Valley-like stock options
to employees. Its underwriters included BancBoston
Robertson Stephens and BT Alex. Brown, and the
company was the object of a tug-of-war between the
NYSE and Nasdaq. It ultimately listed with the latter
because many of its U.S. competitors, such as Sapient
(Nasdaq: SAPE) and Cambridge Technology Partners
(Nasdaq: CATP), were on that exchange.
Changing a reluctant government's listing policy paved
the way for other companies to list in America. "It was
a long, tedious task for us because there were no clear
policy guidelines and it took forever to get clearances,"
says Phaneesh Murthy, Infosys's vice president of
sales and marketing. "Now, new companies are
assured to get clearances in four weeks."
Infosys's IPO was in March, with an offering price of
$34 a share. Its price has since skyrocketed to
Friday's closing of $153 a share. Despite its Bangalore
locale, the company ranks right up with its American
competition, says Robin Richards Donohoe, managing
partner of VC firm Draper International, which solely
invests in Indian companies and in U.S. companies that
do business in India. "Infosys gets most of its revenues
from U.S. companies while competing with the likes of
Keane [Amex: KEA] and Sapient," Ms. Donohoe
says. "It has an edge in offering reasonable fees
because Infosys uses Indian software labor, so it has a
good price-to-quality offering."
Infosys reported stellar second-quarter 1999 earnings
last Friday. It posted a 131 percent jump in net income
to 657 million rupees ($15.1 million) in the three
months ending September 30 from 284 million rupees
($6.5 million) during the same period in 1998. Income
from overseas operations rose to 2 billion rupees ($46
million) from 1.2 billion rupees ($27 million). The
company signed 22 new clients, including
Petopia.com, and is setting up in Canada its first
software development center outside of India.
Mr. Murthy says Infosys is growing slightly faster than
the IT industry's annual growth rate of 45 percent. It
wants to reduce its dependence on Y2K
problem-solving and focus more on e-commerce
solutions, which accounted for 10.3 percent of total
revenues, compared to 6.3 percent in the third-quarter
of 1998. "We're still doing ERP and we're doing more
of e-commerce integration. We can be No. 1 in
integrating the two processes together," he says.
Infosys shares have jumped 170 percent on the
Bombay exchange, but its soaring ADRs (each
accounts for one-half of a common share) are priced
at a 42 percent premium, even though its $10 billion
United States market capitalization is a fraction of that
on the Indian markets.
MULTILINGUAL BUSINESS
Other companies are taking note of Infosys's success
and are starting to follow in its footsteps in terms of
reporting quarterly earnings and giving full disclosure of
revenues. "A few years ago, only one or two followed
the GAP policies; today you can multiply that by ten,"
says the NYSE's Mr. Ugeux. "They realize that in
order to be global players, they have to be understood
by Western investors."
Satyam Infoway, a Hyderabad-based
real-estate-turned-IT firm, now wants to reinvent itself
as an Internet service provider after receiving a
government license to become the nation's largest ISP.
It is scheduled to launch an IPO on Nasdaq in early
November priced at $13 a share. (For more, see "Is
Satyam the AOL of India?").
Expected to follow with IPO filings next year are
blue-chip software firms, four of which rank ahead of
Infosys in terms of total revenue earned. They include
HCL Infosystems, Tata Consultancy Services, NIIT,
and Wipro. "None of these are unprofitable Internet
startups," says the Walden Group's Mr. Das. "They
have all been around for at least 15 years and have
established reputations and revenue streams."
WALL STREET PILGRIMAGE
Big U.S. investors are aware of the potential in India
and have made a concerted effort to woo Indians to
come to America. Investment banks flocking to India
include Merrill Lynch (NYSE: MER), Morgan Stanley
Dean Witter (NYSE: MWD), and Goldman Sachs
(NYSE: GS). Asset management firms Oppenheimer
Funds and Warburg Pincus have started looking for
potential buys.
In terms of venture capital, the Walden Group and
Draper International are the only major U.S.-based
firms scouting for opportunities extensively in the
region. "Many say, It's so good in our own backyard,
why bother jumping through the hoops to follow
government regulations?" says Ms. Donohoe of
Draper. "For us, it's been an exciting yet frustrating
experience."
Mr. Das says Walden Group intends to hang in there
because the potential is so lucrative. But where it
makes sense to shape Indian firms into global
companies, he adds, "we will definitely bring that
company to Silicon Valley."
Another battle shaping up is Nasdaq versus NYSE.
The two are jousting over how to bring Indian
companies to United States investors. The ICICI
Group (NYSE: IC.D), a blue-chip Indian financial
services company, is listed on the NYSE, but Nasdaq
seems to be ahead in the race to list technology firms.
According to the NYSE's Mr. Ugeux, most of the
Indian IPO candidates don't meet the exchange's
market capitalization and profitability requirements, but
he says that the exchange is in serious discussions with
those who qualify. NYSE requires a market value of at
least $100 million, while Nasdaq will accept a
minimum of $20 million.
Despite its potential, India still is an emerging country
with a government that's sometimes in turmoil. "In the
last few years, we've had four or five government
changes. But the good news is that the same party has
come back into power every time," says Infosys's Mr
Murthy. In early October, Prime Minister Atal Behari
Vajpayee was re‰lected to lead the Hindu nationalist
majority coalition, which buoyed stocks on the
country's exchanges. The good news didn't last for
long, though; next-door neighbor Pakistan went under
martial law last week, putting India's army on full alert.
That's not the kind of news Western investors want to
hear; they knocked down foreign-traded shares of
Indian companies after the news. Financial experts say
the tremors will do little to hinder their own interest in
the country, though. "We don't like political
uncertainty, but we know that a company like Wipro
trying to expand its worldwide capacity isn't dependent
on the government in Delhi; their marketing and sales
department is in Silicon Valley," says Mr. Ugeux. "The
government knows its technology is critical to its
long-term economic growth, so it won't do anything to
mess that up. The biggest discovery of the year is that
India is a global player." |
