The Hindu Business Line : Tale of 2 software companies

Both are software companies. Both have been growing extraordinarily rapidly for several years. Their future looks equally bright. Both operate out of India, but their customers and markets are in the US. They epitomise the new India – leaders in software, excellence in quality and delivery, professional management and a global perspective in whatever they do and plan to do.

The two companies are Infosys and Cognizant. The first is much bigger in turnover and profits. But both standout uniquely in India’s crowded software sector for their business models and combination of growth and quality, proving one need not be at the expense of the other.

This is not about their relative prospects or balance sheets or valuations. On the other hand, the two companies are (surprisingly) good case studies in contrast of the benefits and costs of foreign investments in general and portfolio investments in particular.

Infosys’ and Cognizant’s operations are almost entirely India-centric. Software development is done at (comparatively) low cost in this country and delivered to their global customers. All their investments in facilities, infrastructure and manpower are in India.

Big difference

The big difference is that Infosys is a purely Indian company and made its IPO in the domestic stock market. With the liberalisation of foreign portfolio investment and the spectacular performance of the company, FIIs have flocked in to invest in it. Plenty of foreign (and domestic) investors have earned three digit returns on their investments in Infosys’ rupee shares.

What it tantamounts to is that the economy has serviced the foreign investment inflows in Infosys at rates exceeding 100 per cent in many cases and is equivalent to borrowing dollars at these interest rates.

Cognizant, on the other hand, is not an Indian company at all. It was incorporated in the US, although its operations, as stated earlier, are in India. The company is listed on the NASDAQ and has given investors the same order of returns as Infosys.

With one big difference – they are dollar returns on dollar investments in a NASDAQ stock. India is nowhere in this equation.

This means the domestic economy reaps all the benefits of Cognizant’s (direct) investments in terms of employment, exports, etc., but without the usurious costs to the economy of the high returns on portfolio investments in Infosys’ stock.

(Of course, Infosys is in no way to blame for this. Its ADR issues do partly segregate foreign and domestic investments in its shares. And the same argument applies to any domestically-listed company).

Two similar companies with identical multiplier effects on the real economy, but varying impact through the financial sector.

Enough to rethink some assumptions about unfettered offshore flows into our stock markets.

More Stories on : Software | Insight | Infosys Technologies Ltd | Financial Scan

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page