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India Tier I IT Companies: Revenue Up 25.76 Percent
India Tier I IT Companies: Revenue Up 25.76 Percent
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PUBLISHED:
SEPTEMBER
28
2012


India Tier I IT Companies: Revenue Up 25.76%, Enterprise Value Down 16.53% -- Twelve Month Analysis Also Reveals Tier II companies increased sales 17.88% with a 16.07% Decline in Enterprise Value

Bangalore, India, September 27, 2012 -- In the past 12 months, September 2011 to September 2012, India IT companies have increased sales while EV/EBITDA (Enterprise Value/EBITDA) have declined. The analysis further shows that Indian Tier I IT companies have had sales growth of 25.76 percent, and a profit increase of 16.53 percent, while EV/EBITDA has declined 12.48 percent. Tier II companies have increased sales 17.88 percent and profits 15.77% with a 16.07 percent decline in EV/EBITDA*. martinwolf Global M&A Advisors conducted the analysis as preliminary findings in its MW India IT Index.

The results underscore the fact that there is a going to be a new fight for growth and relevancy for India's IT companies. India's IT companies are at an inflection point. In the past, they have been able to sit "inside India" and serve the world through better, cheaper, faster services as we have seen in the explosive growth in BPO in the past decade. The inflection point of declining value suggests that India IT companies "inside India" strategy will result in working harder and getting nothing or little in return.

According to Marty Wolf, CEO of martinwolf Global M&A Advisors, "It begs the question, where can India IT companies find value. The answer is outside India, and oddly enough inside India. But, also what a company does matters in determining value. Highly specialized IT services that are less than $500M in sales can realize a very attractive valuation. And, a large multi-national IT service company like IBM, or SAP in managed services and infrastructure today is worth more than a global BPO organization," he said.

The martinwolf Global M&A analysis of global IT deals in the past year bear this out. For example, BPO companies (voice) sold for 4.7x EBITDA, while Managed Services & Infrastructure Services companies were sold at 15.6x EBITDA, or 3.3 times more than BPO. So, what a company does matters. And, smaller, specialized vertical niche players like Healthcare IT Services companies were sold at 11.7x EBITDA, versus 9.5x EBITDA for Financial IT Services both outpacing valuations of much larger BPO companies.

Size affects valuation as well. Offshore companies exceeding $500M in sales garnered 10.8x EBITDA, versus 5.1x EBITDA for those with revenues less than $500M.

Wolf added, "If you are an IT company what you do matters, and scale matters. When we say, what you do matters, it matters in terms of the type of IT services company you are, and the vertical business segment you service.

For India's Tier I companies, it is critical to look outside India and look more like IBM and SAP. We expect that cross-border transactions will pick up over the next 36 months as these companies acquire growth and relevancy. For Tier II companies, they need to look inward to make certain they are highly focused and specialized serving high-demand markets like healthcare or human resources. Those companies that excel in a niche will also be attractive for a cross-border transaction, as the big global players may want to integrate them to bolster services in one of their verticals."

To address these issues, martinwolf is hosting a panel on October 3, 2012 at the ITC Windsor in Bangalore with the law firm Khaitan & Co., HSBC India, Grant Thornton India LLP, and the Bangalore Chamber of Industry and Commerce (BCIC) to explore the challenges facing India's IT companies at this inflection point. The firm will report on the findings of the panel's insights.

About martinwolf Global M&A Advisors

With offices in San Francisco and Bangalore, India, martinwolf is the world's leading middle market IT M&A advisory, with over 115 transactions completed in six countries.

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