I.T.'s turning point? and article in frontline by C.P. CHANDRASEKHAR

There are signs of foreign firms increasing their presence in an increasingly concentrated information technology sector.

MOHAMMED YOUSUF


The sprawling Cyberabad in the Andhra Pradesh capital offers high-end infrastructure for the I.T. industry. With the U.S. remaining India’s principal market, the growth slowdown in that country together with the long-run depreciation of the dollar has begun to tell on export performance.


TIMES are hard for the world economy, particularly the United States’ economy. This should make the period difficult for any industry that depends on global markets, especially the U.S. market, for much of its demand.

This, unfortunately, is true of India’s information technology (I.T.) industry, dominated by exports of software and IT-enabled services (ITeS). Yet there are signs of cautious optimism among some industry insiders and observers based on the premise that the cost-cutting encouraged by slow global and U.S. growth will increase outsourcing to low-cost locations such as India, which would be good for growth even if not necessarily for margins.

It is too early to empirically confirm this speculation, but the evidence permits some initial judgments. In July every year, Dataquest releases its data on the performance of the top 200 I.T. firms in India the previous financial year. The information, unlike that of NASSCOM, covers the whole of the I.T. sector, including hardware, software, software services and ITeS. It also provides detailed information on the top 20 firms in the composite industry.

This data set, especially more information on the ways in which data are collated in the case of firms whose performance indicators and financial accounts are not easily available in the public domain, leaves much to be desired. But with almost all the data on the Indian I.T. industry being collated by private organisations such as NASSCOM, MAIT, Dataquest and IDC India, this information, which covers both the hardware and software segments, has been an important basis for analysing industry trends in the country.

As yet, we have access only to the first round of data released by Dataquest (July 15), focussing on the top 20 firms in the industry, in the export sector and in the domestic market. The information on the top 20 is an adequate basis for analysing industry trends, not only because they account for an overwhelming share of the revenues of the top 200 (64 per cent in 2007-08) but also because these are the most dynamic firms and have remained industry leaders for a long time. The top 20 list includes industry veterans such as Tata Consultancy Services (TCS), WIPRO and Infosys, which epitomise India’s I.T. success.

On the surface, there is a sameness about the trends the data on the top 20 reveal. The top firms in the industry continue to grow at a scorching pace, with the trend rate of growth until 2007-08 amounting to 34 per cent per annum whether we take 1991-92 or 2001-02 as the base year to make our calculations. Services firms dominate the industry in terms of number and revenues, with 95 of the top 200 companies engaged in services delivery and another 20 in the production and sale of software products. And export revenues still constitute the mainstay of the industry, with the revenues of the top 20 exporters (at Rs.1,02,451 crore) far exceeding those of the top 20 revenue earners in the domestic market (Rs.74,843 crore).

These perennial positives notwithstanding, there is some cause for caution. With the U.S. remaining India’s principal market, the growth slowdown in that country together with the long-run depreciation of the dollar (despite fluctuations) has begun to tell on export performance. The top 20 exporters from the industry recorded a growth in export revenues of 30 per cent in 2007-08 as compared with 45 per cent in the previous year.

Since the growth of revenues of the top 20 firms catering to the domestic market was also slightly lower at 27 per cent in 2007-08 as compared with 31 per cent in the previous year, the performance of the top 20 firms in the industry was disappointing. Top 20 revenues rose by just 23 per cent in 2007-08 as compared with 42 per cent in 2006-07, pointing to the beginnings of a slowdown that could last for a long time. This could be the first sign that the software and ITeS boom is losing momentum.

This slowdown has been concealed by two factors. First, there have been individual companies that have recorded remarkably high rates of growth of revenues, albeit from small bases in the case of some. Thus, 13 of the top 200 companies covered by Dataquest registered triple-digit growth rates in 2007-08. Second, there have been a few companies that managed to expand their net revenues significantly in the financial year gone by. These trends have conveyed the impression that despite being dependent on the U.S. market, the Indian industry is decoupled from a growth slowdown in the U.S. market because the deceleration in growth is more than neutralised by enhanced outsourcing by firms in a recessionary environment.

Concentration of revenues

A. ROY CHOWDHURY


Inside a software company at Salt Lake, Sector-V, Kolkata’s I.T. corridor. Recent evidence shows that as the I.T. industy grows to maturity, the features that made it unique are losing their significance.

The slowdown in growth is not the only new, even if disconcerting, aspect of the figures for the last financial year. The numbers released thus far by Dataquest point to a consolidation of certain trends in the industry that have some troubling long-term implications. The first of these trends is a tendency towards increased concentration of revenues generated by firms in the industry. The top 200 firms account for an overwhelming share of the industry.

In 2005-06, for example, the revenues of the top 200 firms were placed at about 85 per cent of the total industry revenues. What is noticeable is the growing concentration within the top 200 segment. If we take the group of firms constituting the top 200, the top 20 firms (or 10 per cent of the number) accounted for 63 per cent of the revenues of the top 200. The next 30 (15 per cent) accounted for a near proportional 17 per cent of the revenues. And the remaining 150 (or 75 per cent in numerical terms) contributed just 20 per cent of the revenues.

Consolidation and concentration are part of the industry’s maturity. Underlying this concentration is a change in the nature of the firms that constitute the top 20 in the industry as a whole. Increasingly, firms with foreign parents populate the top 20 league tables. While 67 of the top 200 firms are foreign companies, 13 of the top 20 are known international companies. This is indeed a relatively new tendency. The number was as low as three out of the top 20 ten years ago and seven at the beginning of this decade.

What is interesting to note is the differential distribution of foreign companies among the top exporters and top suppliers to the domestic market. While 12 of the top 20 exporters of I.T. products and services from India are Indian firms, only four of the top 20 revenue earners in the domestic market are Indian. It has been known that foreign companies have been displacing Indian firms as major exporters, especially with the growth of the captive outsourcing facilities of foreign firms in the country. But this process has not yet displaced Indian companies such as TCS, Infosys, Wipro and Satyam, service providers that remain the top exporters.

The situation is different in the domestic market. Over the past two decades, an increasingly liberal hardware and software import regime and a liberal policy with regard to foreign presence in the domestic hardware and software market has substantially increased the foreign share in these markets. This did not matter when the size of the domestic market was small in both absolute terms and relative to export revenues. However, as the diffusion in the use of I.T. increases, this unusual distribution of target markets between foreign and Indian firms can become significant.

What is noteworthy is that as the use of I.T. in business and in government increases rapidly, with a limited effort to shift away from proprietary to open source software, the presence of international software product suppliers in the Indian market is increasing rapidly. At a time when the diffusion in the use of I.T. in the country is increasing rapidly, foreign firms have displaced domestic firms in the domestic market at a much faster rate.

At first this was predominantly in the hardware segments where a liberalised import regime and substantially lowered tariffs helped international firms out-compete not just Indian brands but the huge assembled personal computer industry in the country. But, more recently, software presence is becoming important. For example, two global software majors – Microsoft and SAP – registered revenue growth of 29 and 104 per cent respectively in the domestic market in 2007-08.

The emerging picture is clear. Even while India’s scorching pace of I.T. services export growth slows, there are signs that foreign firms are increasing their presence in an increasingly concentrated I.T. sector. This has two implications.

First, I.T. export revenues are increasingly being garnered by foreign firms. But more importantly, as the domestic market for I.T. hardware and software grows, fuelled by increased government expenditure aimed at increasing I.T. use, foreign firms are coming to dominate the rapidly growing domestic market for both hardware and software. This would mean that slowing revenue and employment growth would be accompanied by a shift in the net foreign exchange earned by the I.T. sector, even leading, perhaps, to a net outflow sometime in the foreseeable future.

India’s software and ITeS industry was seen as different from much else of modern business in India because it was a high-growth sector driven by huge net foreign exchange earnings. It was pampered with tax concessions for this reason, and the concessions that were to end in 2009 have now been extended to 2010. But more recent evidence shows that as the industry grows to maturity, the features that made it unique are losing their significance.

Avoid Daily Investment Checking to Prevent Big Mistakes

Does watching cable or checking business news sites give you cold sweats as you ponder how your investments are doing? Are you logging into your financial site every day but still feel your money slipping away? Just ignore your money, J.D. at Get Rich Slowly says—stocks pay off in the long term, not day-to-day, and worrying about it is the easiest way to make a money-losing mistake:

' In Why Smart People Make Big Money Mistakes, the authors note that it's dangerous to watch your investments every day. When you pay close attention, you tend to become emotionally invested in even small movements. You lose sight of the long-term and make decisions based on short-term events. Peek in every month or so, but don't constantly check your investments.'

Sound advice, and a good way to avoid letting money stress spill over into other areas of your life as well. For more reassurance that you can make money when the market sky looks grim, see what our readers recommend as recession-safe investments. How to Conquer Your Fear of Investing [Get Rich Slowly]

Is India heading towards a food crisis?

Rising prices are not pure indicator of crisis

Shortage of food is not only faced by India but it is a globally experienced problem. Drought in Australia has lead to international shortage of wheat and an export ban on rice from Thailand and Vietnam has pressured the international rice supply.

This situation of crisis can be debated in the context of inflated prices of food products and mainly that of staple food. Prices are likely to rise if the supply is not able to meet the demand.

In India, the rate at which the consumer preferences are changing is much less than the rate of slowdown in the production of cereals along with diversification of land towards high value agriculture. This effect is likely to create pressure on supply, but as of now, the rising fuel prices have primarily led to the spurt in food prices.

The concern is that with global shortage of foodgrains, even imports are unviable, but the FCI has assured that there are enough stocks of rice and wheat, if there is actually a situation of food crisis.

Since last two decades, Indian agriculture output is constrained by low yields, falling water table, poor infrastructure, lack of irrigation and no new technological breakthrough. Grain output has been stagnant and agriculture had been growing at a low rate of 2-2.5 per cent. The need for investment in agriculture has been repeatedly highlighted so as to avoid any shortages in future.

On the other side, increase in demand of cereals from the livestock sector for feed, the use of cereals for bio-fuel has further diversified the use of grains. Thus in the present time, high fuel costs, increasing demand for feed, use of cereals for bio-fuel along with unattended supply constraints have created pressure on supply.

In addition, worsening global supplies and rising prices have created a situation that looks like a food crisis. But in a short- term scenario, rising food prices are not the pure indicator of a food crisis. But still, the major concern is that of rising global temperature which would further impact the yields, and this trend of rising prices may not be a short-lived phenomena.

April Fooled by Google and Virgin?

If you don't buy this joke, we'll kill this billionaire. Now, that's satire!

Now that Google has effectively conquered Earth, the all-powerful Web giant is setting its sites on a new frontier: Mars.

Calling it "The Adventure of Many Lifetimes," Google co-founders Larry Page and Sergey Brin just announced a joint venture with Virgin CEO Sir Richard Branson to colonize the Red Planet because, as the press release states, "Earth has issues, and it's time humanity got started on a Plan B."

Uhhhh, right. Happy April Fool's Day, folks.

There's nothing funnier than billion-dollar corporations taking time out of their busy multinational money-making days for a little light humor.

Here's what's been announced on the Google blog:

"For thousands of years, the human race has spread out across the Earth, scaling mountains and plying the oceans, planting crops and building highways, raising skyscrapers and atmospheric CO2 levels, and observing, with tremendous and unflagging enthusiasm, the Biblical injunction to be fruitful and multiply across our world's every last nook, cranny and subdivision ... So, starting in 2014, Virgin founder Richard Branson and Google co-founders Larry Page and Sergey Brin will be leading hundreds of users on one of the grandest adventures in human history: Project Virgle, the first permanent human colony on Mars."

Why Mars? Google representative Andrew Peterson cleverly dodged the question, explaining, "Because software engineering isn't rocket science, producing truly stellar products requires us to boldly innovate where no technology company has innovated before."

Ah, corporate branding still going strong in the midst of April 1st tomfoolery.

The blogosphere buzzed Tuesday morning with reactions ranging from amusement to confusion to irritation. Blame the economic turmoil, the Iraq war or the increasingly bitter presidential campaign for the less-than-warm reception: "I mean, hohoho, some of the richest men on Earth have done something to benefit humanity," one commenter writes. From another: "If this were real, China would beat us to it." Others scoffed that Google actually pays employees to produce these pranks. "A joke should have an element of humor. This one seems very sad. It's a shame they wouldn't contribute to something that monumental."

Hashem Bajwa, digital planning director at the San Francisco-based ad agency Goodby, Silverstein & Partners, itself part of a satirical moon-based ad campaign for Rolling Rock, notes the irony of this year's Google gag: "It's not a total disconnect from what Google does. So many people are asking, what will Google do next? If anyone would do it, it would be Google."

Google's brand is known for both its ambition and its quirkiness, and the company's logo "Do No Evil" seems to allude to the power it wields. In fact, Google has teamed up with the world's top astronomers to create "Google Sky," a new feature that allows anyone with a computer and Internet connection to "to browse and explore the universe" through the Hubble Space Telescope; Googlers will even be able to see the universe at x-ray or infrared wavelengths.

That one's not a joke. And if nothing else, it's a good jumping-off point for Mars.

Whatz Subprime crisis and Subprime pain: Who lost how much

The United States' subprime crisis has turned out to be bigger than previously thought and has the potential to drag the world's largest economy into a recession.

And although there are varying opinions on whether the US could slip into a recession or not, most economists do feel that despite the US Federal Reserve's rate cuts and the Bush administration's $161-billion economic aid plan, chances of a recession are high.

Be that as it may, one thing is for certain: the losses from the subprime that financial majors have incurred will take a long time to get over.

Given below, in the table, are the estimated losses that some of the world's largest banks have suffered on account of home loan defaults in the US. The total figure adds up to over $76 billion and does not take into account losses suffered by many other financial majors that had an exposure to the crisis.

Four Indian banks -- State Bank of India, ICICI Bank, Bank of Baroda, and Bank of India too have big exposure to credit derivatives, with the spreads on these widening since international lenders turned risk-averse following the crisis in the US subprime (or high-risk home loan) market.

Credit derivatives are instruments for which the underlying asset is a loan or a bond. Marking to market means valuing a portfolio based on the prevailing market price.
Subprime losses till date

Bank - Losses -

Citigroup - $18.0 billion
UBS - $13.5 billion
Morgan Stanley - $9.4 billion
Merrill Lynch - $8.0 billion
HSBC - $3.4 billion
Bear Stearns - $3.2 billion
Deutsche Bank - $3.2 billion
Bank of America - $3.0 billion
Barclays - $2.6 billion
Royal Bank of Scotland - $2.6 billion

IKB - $2.6 billion
Societe Generale - $2.0 billion
Freddie Mac - $2.0 billion
Wachovia - $1.1 billion
Credit Suisse - $1.0 billion

ICICI Bank has the highest exposure of $1.5 billion. SBI has an estimated exposure of $1 billion, BoI of $300 million, and BoB of $150 million. About 5-10 per cent of this figure could be the losses that these banks could incur.

Understanding the subprime crisis

Just what is the subprime crisis? And why is it having such a decisive impact on the Indian stock market?

Let's understand it. Take, for example, an American who seeks a home loan, but does not have a very good credit rating. That essentially means that banks may not extend him a home loan. Enter, another American with stellar credit rating and the willingness to take on some risk. Given his good credit rating, banks are willing to give him a loan at a certain rate of interest.

This individual the divides the loan into small lots and gives them out as home loans to lots of Americans, who do not have very good credit rating and cannot get a home loan from any bank. He gives out the home loan at a rate of interest higher than it is paying to the bank it borrowed money from.

This higher rate is referred to as the subprime rate and this home loan market is referred to as the subprime home loan market.

By giving out a home loan to lots of individuals, the individual ensures that even if a few of them default, his overall position is not affected much. But the individual giving out loans in the subprime market does not stop here. He does not wait for the principal and the interest on the subprime home loans to be repaid, so that he can repay his loan to the bank, which has given him the loan.

He goes ahead and securitizes these loans. Securitization involves converting these home loans into financial securities, which promise to pay a certain rate of interest.

These financial securities are then sold to big institutional investors. The interest and the principal that is repaid by the subprime borrowers through equated monthly installments is passed onto these institutional investors.

The individual giving out the subprime loans, takes the money that he gets from selling the financial securities and passes it on to the bank, he had taken the loan from, thereby repaying the loan.

A neat plan. But then things went horribly wrong. The subprime home loans were given out as floating rate home loans. So as interest rates increased, the rates on floating home loans too went up, and so did the monthly installments needed to service these loans.

These high installments hit the subprime borrowers with the terrible force. Many, given their poor credit rating to begin with, defaulted. Once, more and more subprime borrowers started defaulting, payments to the institutional investors who had bought the financial securities stopped, leading to huge losses.

So how did that effect stock markets in India? Institutional investors who had invested in securitized paper from the subprime home loan market, saw their investments turning into losses. Most big investors have a certain fixed proportion of their total investments invested in various parts of the world.

Once investments in the US turned bad, more money had to be invested in the US, to maintain that fixed proportion. In order to invest more money in the US, money had to come in from somewhere. And this money came in from emerging markets like India, where their investments have been doing well.

These big institutional investors, to make good of their losses on the subprime market, have been selling their investments in India and other emerging markets. Since the amount of selling in the market far overweighs the amount of buying, Indian stock prices have been falling.
Additional inputs: Business Standard

Subprime crisis: Worst may be yet to come

Much has been written on the subprime crisis and the impact it will have on the world, in general, and on India in particular. However, the worst might be yet to come.

So what is the subprime home loan market? It is aggregation of those individuals in the United States to whom, normal banks do not lend, for the simple reason that their credit histories are not good. Hence, there is a greater chance of the individual taking the loan defaulting. And no bank likes to take on customers who are likely to default.

Here is where institutions which have a good credit rating and are willing to take some amount of risk, come in. They borrow money from banks and lend it to the Americans who have a bad credit rating. They divide this loan, into a lot of small tranches and give it out as home loans to Americans who do not have a good credit rating and to whom the bank will not give a home loan directly.

They give out the loan at a rate of interest, which is obviously higher than the rate at which they had borrowed from the bank. This higher rate is referred to as the subprime rate and this home loan market is referred to as the subprime home loan market.

The loans given out in the subprime market are largely adjustable rate mortgages(ARMs). These mortgages are somewhat similar to the floating rate home loans given in India, where as the interest rates vary, the equated monthly installment (EMI) of the floating rate home loan also varies. But there is more to the ARMs than that.

The two most popular adjustable rate mortgages are the interest-only ARMs and payment-option ARMs.

Interest-only ARMs, as the name suggests, involves paying only the interest on the loan for the first few years. This can typically vary anywhere from 3 years to 10 years. After that the principal repayment kicks in. What this does is that during the initial few years of repaying the loan, it keeps the EMI low. Once the principal repayment kicks in, the EMI starts increasing substantially.

Under the payment-option ARM, the interest rate for the first year is very low. After that, the interest rate is the same as other mortgage loans. But the low interest rate comes with a cost attached. The unpaid interest, essentially the difference between the offered interest rate and the real interest rate that is being charged on other mortgages, gets added to the overall loan and the overall loan keeps increasing.

There are certain dates on which these loans are reset. When these loans are reset, the EMI on these loans changes. The largest resets are expected to happen in the first six months of next year.

In 2007, around $197 billion of subprime loans have been reset. Estimates suggest that in the first six months of 2008, around $521 billion of resets are expected. Of this resets nearly 30% will be on interest-only ARMs and payment-option ARMs.

What this means is that the EMI of the subprime borrowers, who have either an interest-option ARM or a payment-option ARM, is expected to go up, as and when these resets happen. Once this happens, whether the subprime borrowers will continue to pay their EMIs is not very certain.

As we have seen in the earlier articles, the institution giving out the home loans in the subprime market does not keep the loans on its books. It does not wait for the principal and the interest on the subprime home loans to be repaid. It goes ahead and securitises these loans. Securitisation essentially involves, converting these home loans into financial securities, which promise to pay a certain rate of interest. These financial securities are then sold to big institutional investors.
The interest and the principal that is repaid by the subprime borrowers through EMI is passed onto these institutional investors who buy these financial securities.

Now once the EMIs go up, there is a great chance that subprime borrowers may not be able to pay them. If these EMIs are not paid, then investors who had bought the securitised paper will not get paid and hence suffer losses.

To cover their losses they may have to sell their investments in emerging markets like India, where there investments have been generating return.

And when they sell their investments in emerging markets, the markets are likely to fall, if there is less buying at that point of time.

What are Participatory Notes?

There has been talk about 'banning' Participatory Notes after the unexplicable rise in the Indian stock markets in the last few days. What exactly are 'Participatory Notes' or PNs?

The article below in The Hindu Business Line attempts to throw some light on PNs

What are ‘Participatory notes’? D. Sampathkumar Mumbai, Oct. 17

‘Participatory notes’ are instruments that derive their value from an underlying financial instrument such as an equity share and, hence, the word, ‘derivative instruments’.

When the Indian capital market regulator permitted, back in 1992, foreign institutional investors (FIIs) to register and trade in Indian securities, every one assumed that they would make proprietary investments out of their own capital.3rd-party investments. There was no question of their trading on anyone else’s behalf. But as it turned out, FIIs were merely acting as a conduit for third-party investments.

But some of these third-party investors had their own preferences in the matter of what Indian stocks that they would like to own with its own risk and reward characteristics. In order to ring fence, each such pool of investments they created accounts or ‘sub-accounts’ in FII parlance.Sub-account holders. But even sub-account holders, it turned out, were not investing their own money but were in fact raising money from a multitude of high net worth individuals.

They were issued pieces of paper that derived its value from underlying equity instruments of Indian corporates. The participatory notes were now well truly launched. International investments got a little more complicated with sub-account investment institutions raising loan funds as securitised paper, with a pool of underlying equity shares of Indian companies.

All this leveraged money got further leveraged with the investments going into not just equity shares but derivative instruments (futures and options) of shares of Indian corporates.

Thus one could have a sub account holder of a registered FII investing a combination of subscriptions by a group of investors topped up with funds borrowed by floating yet another piece of tradable instrument using a pool of participatory notes as collateral.

But the tale of leveraged investments became a little more complex with a $100 of such funds getting invested, for example, not in Reliance shares but into futures contract on Reliance shares.

Futures contract

Now, in a futures contract, one did not have to invest the full value of the contract. It is enough if put up a small margin and topped it up each depending on how the share price moved.
The potential of $100 got further magnified.

It is easy to see the super structure of heavily leveraged investments flowing into the Indian stock market. That is without even thinking of whatever private financial arrangements that each one of investors in the original pool of investments that gave rise to the participatory notes.Global liquidity.

All of this became possible when there was a global liquidity thanks to the economic policies of the West and more particularly the US. A financial distress for one lender who participated in leveraged transaction of investments of a sub-account holder of an FII who had invested in the Indian stock market can cause him to call back his loan.

This could lead to the sub-account holder closing out his futures position in the underlying share which caused the latter’s future price to fall.

Share prices

Since future prices are in turn linked to the spot prices of the same share, there is a price correction in the spot price as well. The fall in share price erodes not just the overseas investor’s wealth but that of domestic investors as well.

The depreciation of the rupee’s value against other currencies or wiping out huge chunk of the RBI’s currency reserves when the liquidated investments goes out of the country, are the other unintended consequences of the FII play on the Indian stock market.