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Sunday, 10/09/2005 3:35:29 PM

Sunday, October 09, 2005 3:35:29 PM

Post# of 596153
INDIA.Many words have been poured over China, but
INDIA is hot on their heels and may represent an
interesting venue.
I keep an open eye on this huge emerging market.
Herewith an article, although somewhat old, still
very relevant:

India's Gaining Market Share a key topic of The Wall Street Transcript IT Services Report
Wednesday September 14, 8:43 am ET

67 WALL STREET, New York--September 14, 2005--The Wall Street Transcript has just published its IT Services report, offering a timely review of the sector to serious investors and industry executives. This 38-page feature contains expert analysis from three leading research analysts, plus industry commentary through in-depth interviews with top management from 7 firms. An "Off-The-Record" review of management by management is also included. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Long-term growth metrics, India's market share, Indian Strategy of US firms, Technology education, Offshore solutions, Government IT growth, Global markets, M&A trends, Outsourcing & consulting markets, Investor attitudes, Stock recommendations, Stocks to avoid.

Companies include: Accenture (ACN), BearingPoint (BE), Infosys Technologies (INFY), Satyam Computer Services (SAY), Cognizant Technology Solutions (CTSH), Ness Technologies (NSTC), DiamondCluster (DTPI), CIBER (CBR), CACI (CAI), SRA International (SRX), Cognizant (CTSH), Covansys (CVNS), Kanbay (KBAY), SI International (SINT), MTC Technologies (MTCT), Anteon (ANT), ManTech (MANT), Lockheed Martin (LMT), Northrop Grumman (NOC), Wipro Limited (WIT), First Data (FDC), Fiserv (FISV), Global Payments (GPN), iPayment (IPMT), Alliance Data Systems (ADS), Zanett Inc (ZANE), Allin Corporation (ALLN), Syntel INC (SYNT), Answerthink INC (ANSR), SRA International INC. (SRX), Associated Network Solutions PLC. (ANS.L), Analysts Include: Jamie Friedman, Fulcrum Global Partners LLC, Sandra Notardonato, Robert W. Baird & Co., Moshe Katri, SG Cowen Securities Corp.

In the following brief excerpt from the 38 page report, Jamie Friedman discusses the ongoing market share gains of India in the IT Services sector, and the outlook for investors.

TWST: Looking at the services side, what's going on from a business perspective so far this year?

Mr. Friedman: You can segment the industry as follows. There are the pure commercial vendors that sell to the private sector. There are the public sector vendors that sell into the federal, state and local governments. There are the offshore vendors and then there are the captives or conglomerates that marry all three. In general, there have been fairly good growth indicators from all three sectors. We have average pricing in each sector improving maybe hundreds of basis points for the first time in a number of years. What the companies are struggling with still is the cost side, i.e., managing their margins.

TWST: Is the demand just reflective of a better general environment?

Mr. Friedman: SAP (SAP), which is maybe the largest application software vendor, increased their sales about 15% in the first half of calendar 2005, and that has called in a need for systems integration from the guys who actually put that stuff in place. The demand is reflective of modest improvement in IT purchasing at the level where you require systems integration. So although we have had PC sales that have been decent for a number of years, this is the first year since arguably the end of 2001 where we have seen acceleration on the enterprise side,

TWST: That means India continues to take market share?

Mr. Friedman: India continues to take market share from an investment point of view, which is what most Wall Street Transcript readers are interested in. American investors and American companies are participating in India. So just because it's sourced from India doesn't mean it's owned by India. The main companies are Accenture, which has spoken publicly about having 50,000 employees in India over some time frame of years, but that's a big number, in concert with IBM (IBM), General Electric (GE), Hewlett-Packard (HPQ), Oracle (ORCL), and Cognizant, which is a captive. It's a US-based company with their IT services offshore. At the same time, you have the Indian guys coming here. You have Infosys opening up a domestic consultancy in the US, and you have Satyam with a nearshore model that's in the US. So we have four guys here for six guys there. The borders are blurring for a global delivery model, but there are still a couple of constants like in any industry.

One, you look for purchasing power parity, which means that you go to the low-cost provider. Two, you have to have fungible IT talent. What that means is that you have to have IT talent that's educated, whether it's in the United States or in India, with a certain level of skill sets and business process knowledge. I would argue that the business process knowledge is still a little behind the curve in India, though it is much better than it used to be. So basically, you can get highly qualified, cheaper labor in India, which means that you, as a commercial vendor of IT services, need to have a presence in outsourcing.

TWST: When you talk to investors about this space, what's the prime concern or question?

Mr. Friedman: I've been covering this subject for two years, and if we talk to five investors about outsourcing, there will be two people who have been doing it less than I have, there will be two people who have been doing it more than I have, and there will be one person like me. The point is that there is quite a bit of new interest in outsourcing, but among the people who have been doing it for a while, the focus is not so much on the demand trends, which are good, it's more on the cost trends because the increased demand is causing wage inflation.

There are about 200,000 graduates from the Indian Institute each year. At that level, there is minimal wage inflation, but when you get into the third, fourth and fifth years of middle management where people actually have customer-facing relationships, that means they start to know their customers and tend to have some wage inflation at that sector. So the focus really for the last six months has been on operating margins because, although rates are rising modestly and revenue is rising nicely, costs are rising on the labor side as fast. So the companies are struggling to maintain their margins.

TWST: Given that, what are you telling investors to do in this space?

Mr. Friedman: You need to have exposure to India; you should be disciplined on multiples. The company that we like the most is Satyam, in part because it trades at half the multiple of the peers. It has a multiple of around 20 times next year's earnings, whereas some of the peers are in the 40s. It has probably the best chance at stable operating margins, and it has the largest SAP practice in India. So that combines to us to make an attractive investment.

TWST: Why the multiple disparity?

Mr. Friedman: The multiple is lower at Satyam because the growth rate is lower. Cognizant has the fastest growth rate at about 50%; Infosys is the next fastest at 40%, Satyam is about 35%. So they are growing slower. So on a p/e to growth basis, they trade at a similar ratio to Cognizant, but on a pure p/e basis, they trade 20 times where Cognizant trades 50 times. Our point would be, you are not going to get multiple expansions out of a 50 multiple company, but you could get multiple expansions out of a 20 multiple company.

TWST: Who are they serving?

Mr. Friedman: Satyam's largest customer is General Electric, but DuPont (DD) was a recently announced customer along with Ford Motor Company (F).

TWST: So they are playing with the big boys?

Mr. Friedman: They have big, big customers. A typical customer spends somewhere between $3 million and $30 million a year with them.

TWST: As one of the smaller players, can they compete with the big guys?

Mr. Friedman: They are not as small as you might think, first of all. They are $5 billion market cap. They are mid-cap, but they are bigger than some of the other ones that you might hear about like Kanbay International (KBAY) and Ness Technologies. They are not as big as Infosys, which is $20 billion, and not as big as Cognizant, which is $10 billion. They compete in part by having made a decision maybe three years ago to build as big an SAP practice as they could, and they really married that vendor. So what is good for SAP accrues to Satyam. In addition, they are not as concentrated in the tech hubs in India like Bangalore; they are more in Calcutta. So they don't see the type of wage competition that you might in other parts of India.

TWST: So they have a slight edge there?

Mr. Friedman: They have a slight edge there. Satyam is probably our best idea in India.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 38-page special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

For Information on subscribing to The Wall Street Transcript, please call 800/246-7673