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The Rediff Business Interview/P S Subramanyam

'What oil is to Middle East, infotech is to India'

The Unit Trust of India is the most critical institutional player on the Indian stockmarkets. Yet, why is it keeping such an uncharacteristically low profile in these troubled times? UTI Chairman P S Subramanyamconceded that this is the best time to pick up infotech stocks, which are languishing at an all-time low price, while discussing the issue with Pritish Nandy. After all, information technology is where the hidden wealth of India lies.

Why is there such a bloodbath in the stock market and why is the UTI not stepping in to restore stability as it once used to?

There appears to be a sustained attack against information technology stocks by certain vested interests in the stock market. Frankly, why I have no idea. Nor do I have the time to find out. But that is the impression one gets from the way these stocks have been hammered down despite the fact that most of the key IT companies have been doing extremely well.

As to why we are not stepping in to stem the tide, the answer is simple. We do not have that kind of surplus funds to invest. Our money is already invested and were we to try and pull some of that money out tore invest in IT stocks, many of which are going at a very attractive price today, it could drag the market further down and create more chaos. No, this is not the time to sell anything. And the problem is that if I cannot sell, I cannot buy. One would need at least Rs 30 billion to stop the downslide. At least Rs 2.5 billion to Rs 3 billion need to be put into the market every day for ten days if one has to intervene. But where is that kind of money?

And selling in a sliding market like this would obviously reduce your NAV, which you may not like to do?

Absolutely right. There is no way one can sell under these circumstances. And unless we sell, we cannot buy these IT technology stocks, however attractive they may look at the current prices.

Which means you rate them as attractive buys at the current price?

Very. In my view, what oil is to the Middle East, information technology is to India. Just as the Middle East has prospered on oil, India will ride IT to emerge as a global super power. It is my view, purely as a nationalist Indian, that it is this sector that will make India one of the strongest forces in the world in the coming years.

It is high time market players stopped looking at NASDAQ for what they should do in India. While NASDAQ may have initially taught us how to appreciate the true value of software stocks, it is time to recognise the inherent strengths of our own IT industry. We need no more follow NASDAQ blindly. Indian software companies are doing extremely well and they have the potential to grow much bigger. If you ask me, the time is not far away when NASDAQ will have to follow our bourses. You must remember, Sir, that we are the leaders in information technology today. That is obvious from the way our talent is being wooed by other nations.

Do you see this phenomenon continuing or do you think this is just a temporary phase?

It all began with body-shopping. Catering primarily to the US and European market. But over the years the inherent knowledge-base of the English-speaking Indian community has ensured what you could describe as a rapid rise up the value chain pyramid.

As we have moved up the value chain, revenues have grown. They will grow further. So will profits, which in turn will enhance shareholder value. This will give rise to higher market cap.

You must view our IT industry in the context of the emerging global scenario where software exports have risen from $ 225 billion in 1993 to $ 4,000 billion in 2000. This translates into a CAGR of 50.3 per cent. The mix shows that 58 per cent of these exports came from onsite development of software, 34 per cent from offshore operations and 8 per cent from product development.

Our domestic software market has grown by 47 per cent CAGR, from a level of Rs 4.9 billion in 1993 to Rs 73 billion in 2000. This is amazing by any standards and shows how strong is our presence in the global IT business. We must seize this opportunity.

Do you think there will be a further erosion of value in the stock market with India's weightage coming down in the MSCI Emerging Market Free Index?

What most people have not realised is that while India's weightage in the index may have marginally come down to 7.45 per cent with the return of Malaysia to the index and some adding and dropping of specific stocks, IT companies account for 1.45 per cent out of this. This is not a bad thing at all. It shows how important the IT stocks are.

What is India's market share in the global IT business?

Very small and that is exactly why there is so much opportunity to grow. The US accounts for 44 per cent, Europe 28 per cent, Japan 15 per cent. Asia is just 2 per cent. The spending pattern discloses huge scope for rapid increase in IT spending in the coming years. In spite of this, the share prices of Indian software companies have come off by over 50 per cent since mid-February!

This is, as I have said in a recent speech, very baffling and looks suspiciously like the handiwork of vested interests who want to jam the growth of our IT sector. The NASSCOM-McKinsey survey anticipates a 15 fold increase in the sector by 2008. Can you imagine what this means in terms of growth and size?

In other words, you root for huge growth in the IT sector?

Certainly. It is my conviction that we must keep faith in India's future potential in this sector and not allow the cynics to discourage us. We can easily average a 50 per cent annual growth rate over the next five years. Our IT companies are strong and well equipped to take on large projects on a wide variety of technology platforms.

Operating margins will grow at 30 per cent. Infosys gets average bill rates, I understand, of $ 32 per man hour at an operating margin of 40 per cent. This compares with $ 75 to $ 100 per man hour for US service companies, which translates into an operating margin of 7 to 8 per cent. Can you imagine the opportunities this provides? Yet, you have people asking if IT stocks, including media and telecom, are over-valued! Over-valued! This is the business of the future. This is the business that will turn India into a global super-power. Going by their track record and potential, most IT companies will outperform non-IT companies by a wide margin on a sustained basis in the foreseeable future. That is at least my view, my prognosis.

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